These Bear-Market Stock Strategies Aren’t Working This Time Around
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Here's your Money Briefing for Thursday, September 29th. I'm J.R. Whelan for The Wall Street Journal. Don't let yesterday's stock rally fool you. We're still in a bear market. And as you watch your stock portfolio and 401k drop in value, you might be tempted to buy the dip and pick up shares of so-called quality stocks to make some quick gains. But those strategies aren't working as well as they used to.
Quality stocks as a whole have underperformed the overall market by... Oh, one, two, maybe three percentage points on average, which might not be so bad, except with the market down 20% as a whole, being down more than 20% in what you believed were the best stocks can be kind of painful.
Jason Zweig writes the WSJ's Intelligent Investor column. Coming up, we'll talk with him about why traditionally reliable stocks amid economic instability haven't been so reliable, and what changes you can make to your portfolio to weather the market storm. That's after the break.
Yesterday's market rally aside, this year's steep stock market declines might have a lot of people feeling queasy when they check their portfolio or 401k. But while many past bear markets have offered investors an opportunity to minimize their losses by scooping up beaten down shares of highly profitable companies, 2022's bear market is different. Wall Street Journal intelligent investor columnist Jason Zweig is here to explain why buying the dip in this market and seeking out so-called quality stocks could keep investors in the red. Jason, thank you very much for being with us.
My pleasure. Thanks for having me, JR.
So, Jason, often in downturns like this, investors look to the so-called blue-chip stocks, you know, the old reliable companies, to level out the volatility in their portfolio. And there are lots of funds that tout a basket of what many call quality stocks. What are they?
It kind of is what it sounds like, companies that are very high quality, typically low debt, high profitability, and in theory, you would expect them to be resistant to a downturn. And some examples of companies that might be regarded as high quality today would be, you know, Apple, Google, Facebook in technology, or Pfizer in healthcare, Procter & Gamble in consumer products. You know, companies that are extraordinarily healthy financially have a dominant position in their industry and tend to be highly profitable.
What is the episode's warning about relying on quality stocks during this bear market?
Okay, and so how have they performed?
Well, so far in 2022, they've been disappointing. Quality stocks as a whole have underperformed the overall market by one, two, maybe three percentage points on average, which might not be so bad, except with the market down 20% as a whole, being down more than 20% in what you believed were the best stocks can be kind of painful. Why haven't they done well? Well, there's two reasons. One is in a market downturn, it's perfectly natural for investors to sell the easiest to sell stocks first. So the biggest, best companies are the ones where people can most easily raise cash. So they will sell those first. And then the second reason is that a lot of these companies just got kind of overpriced. because quality doesn't come cheap.
Another thing investors should bear in mind is that quality is not, well, it's not an objective quality, right? To some extent, it's subjective. Different money managers define quality in different ways. Some might say it's companies that are highly profitable, which frankly is the classic definition.
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