Morgan Stanley Analyzed 43 Bear Markets and Here's What It Found

Will history repeat itself?

Finding Fair Value in a Global Market Selloff

U.S. stocks may be looking a bit better after one of the worst starts to the year on record, but a number of markets, especially the emerging kind, have already entered or come within points of a bear market.

Investors seeking clues as to the future direction of global equities might turn to history as their guide; Morgan Stanley analysts led by Andrew Sheets certainly have. They've crunched the numbers on more than 40 bear markets thoughout history, defined as a more than 20 percent peak to trough decline.

Here's what they found.

How long will the downturn last and how far could it go? 

On average, large sell-offs last about 190 business days and investors might expect a 30 percent pullback in that time frame based on previous history, Morgan Stanley says. For the S&P 500, the bear market cycle usually takes a bit longer. Sheets and Co. concluded that for the U.S. index the median bear market lasts for about 272 days and declines were roughly 28 percent, or slightly less than the worldwide average. 

Japan's Topix index saw by far the longest median bear market duration at 568 business days, skewed perhaps by the country's Lost Decade. Here's a look at the average bear market across various regions:

As of today, the MSCI emerging market index is the worst performer with a 35 percent decline over the past 362 business days. That could mean EM is finally set for a turnaround, as the average duration for a decline is actually the shortest at 121 days and the drops are typically 31 percent, as seen in the previous table. 

How do the sectors stack up?

In terms of sectors, a continued decline in commodity prices and slowing global growth means the energy and materials sectors have already reached or surpassed the typical sell-off but interestingly, industrials have yet to hit that mark. Consumer discretionary, technology and utilities also haven't fallen as much as they have historically either.

Morgan Stanley recommends buying financials across regions while taking a more cautious outlook on U.S. consumer staples, healthcare, and utilities. It is also underweight consumer staples in Europe. 

On its list of the most favorable stocks in the U.S. the team includes JP Morgan Chase & Co., Microsoft Corp., Visa Inc., NIKE Inc., and Starbucks Corp. Stocks the firm is calling "unfavorable," include Ford Motor Co., Twitter Inc., Sprint Corp., GoPro Inc., and Virgin America Inc

What happens after the sell-off?

Perhaps the question most on investors' minds is what happens après le descent. For the MSCI all country world index, which includes a number of developed as well as emerging markets, the market typically rises 30 percent over the next 12-months following a decline of 17 percent. 

For the S&P 500, the recovery is usually 18 percent over the next 12-months after a decline of 11 percent. 

Of course, no discussion of previous bear market history would be complete without a caveat. As Morgan Stanley notes, we are starting the current sell-off from a pricier place than in the past, with valuations still more expensive than previous troughs.

Still, even on that basis, "EM valuations are closest to trough levels."

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