GMO explores how bear markets unfold and why deeply discounted assets may offer opportunity even during extreme volatility. The paper highlights a historic -30% drawdown alongside unusually wide valuation spreads, arguing that cheap assets tend to lag early but outperform later stages. It also points to emerging markets and currencies as particularly dislocated.
It’s Always Darkest Before The Dawn
GMO
Research
6 Pages
Key Takeaways
Three Phase Pattern: Bear markets follow 3 phases where cheap assets underperform early but outperform in phases 2 and 3, historically delivering stronger returns as drawdowns deepen.
Extreme Valuation Gaps: EM currencies sit 1.4 standard deviations cheap, while prior cycles showed EM Value outperforming U.S. equities by 55% cumulatively from 2000–2003.
Volatility Spike Dynamics: The S&P 500 saw more 3%+ daily moves in 20 days than the prior 5 years, with global equities falling roughly -30% in record time.
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