A recent paper by Research Affiliates highlights parallels among six bear markets in the U.S. that were accompanied by recessions to “improve our understanding of their unique risks and opportunities.”

“We use these six episodes as case studies to explore the potential outcomes investors can expect when the market recovers,” the paper states, noting that its primary focus is on implications for value strategies.

The six events are as follows:

• Vietnam War
• Nifty Fifty bubble and oil crisis
• Iran oil crisis and Fed monetary policy tightening
• Early 1990s monetary policy tightening
• Tech bubble
• Global financial crisis

The paper makes the following key points:

• Value significantly outperforms in bear markets “and over the full cycle of recession-recovery when preceded by the bursting of a bubble, characterized by a wide value-growth valuation dispersion.”
• Value reflects weak performance when a bear market is triggered by a shock to fundamentals, which has been the case during the coronavirus-related lockdown (the paper refers to it as the “Great Lockdown”).
• “Value, quality and small-cap strategies all tend to perform well during recoveries regardless of the catalyst for the bear market and recession.”
• The persistent dispersion between value and growth valuations is a sign that the market “remains in bubble territory,” the article says, adding, “Should the bubble burst, the closing of the valuation gap would imply an attractive opportunity for value investors.”