Another Tumble Could Be In Store For Stocks. You Won't See Another Like It

Another decline in the stock market is quite possible soon. If it occurs, different equities than last time will be the ones that stand to be impacted the hardest.

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The stock market has already exited the worst of its bear market, which is characterized as a 20% or higher decline from a prior high and was reached in early 2022. The S&P 500 indexSPX +1.27% experienced a slighter decline at its historical low in early October before increasing by roughly 10% since then. 

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But don't fall for it. The market is still unstable due to the present banking issues. Undoubtedly, since the demise of Silicon Valley Bank, banks and financial institution assets have been purchased, increasing liquidity—and stabilizing—the banking system. But as a safety net, the Federal Reserve was forced to lend more than $160 billion to numerous institutions. Banks with worse financial standing must deal with the possibility of depositor withdrawals, which would force them to cut back on lending and decrease overall expenditure. As a result, the S&P 500, which is currently trading below its year-to-date high, may eventually falter.

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If that occurs, the decline would appear somewhat different than what it did whenever the bear market first started.

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The worst-hit stocks in the 2022 market correction were those in the higher-growth technology sector. The Nasdaq CompositeCOMP +1.58%, which includes a number of rapidly expanding technology stocks, dropped as much as 36% from its peak to its trough. That's because runaway inflation was driving up bond yields, forcing the Fed to raise interest rates in an effort to curb inflation by stifling demand for goods and services. That hurt tech shares the most since faster-growing businesses anticipate that the majority of their profits will come in the future, and future profits lose value when long-dated bond yields increase. 

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Value stocks could suffer the most loss this time around. Bond rates also tend to decline when markets are concerned about economic peril, such as that brought on by banking failures, as these companies' equities are more matured and have earnings which are more cyclical.

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The Fed would be prevented from raising rates sharply as a result, which would drop bond yields and pressure inflation. This would support the valuation of technological and growth equities while weakening the economy and harm cyclical value names. 

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Since interest rates and interest rate expectations have been lowering, growth sectors have outperformed, according to Lori Calvasina, chief U.S. equity economist at RBC Capital Markets. The most failing sector is financials, although industries like energy, materials, and manufacturing are all cyclical/value sectors.

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In fact, as yields have decreased, growth equities have recently performed better than value ones. Value has underperformed growth the entire year. According to RBC, the Russell 1000 GrowthRLG +1.34% index's present level in relation to its value equivalent was not observed until the end of the summer.

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Growth stocks may be a superior investment for individuals worried about the state of the economy.