Stock markets around the world have been extremely volatile this year. By quarter end, many indices had entered bear territory, a decline of at least 20% from their last peak. In a sign of how tumultuous the year has been, this is the second time markets entered hibernation — a brief summer rally pulled many markets out of midyear doldrums before they faltered again. Today, many investors are focused on the possibility of recession and more pain ahead.

“No one knows when this decline will end, but I am confident it will end, so I encourage you not to get caught up in pessimism,” says equity portfolio manager Don O’Neal, who has 36 years of investment experience and has navigated several bear markets. “Declines create opportunities for investors who remain calm. If we make good decisions in times of stress, we can potentially set up the next several years for strong returns.”

In unnerving times like these, it’s helpful to hear from veterans like O’Neal who have survived numerous bear markets. We asked O’Neal and some of his colleagues to share lessons learned from past bear markets and how they are applying those lessons today.

My experience has taught me that markets have long cycles. I believe the pandemic marked the end of the post-global financial crisis cycle — a cycle dominated by deleveraging, demand shocks and expanding globalization. These conditions led to looser monetary and fiscal policy, low cost of capital and stock price inflation.

Today, we are at the beginning of a new cycle, one that I expect will be marked by deglobalization, a shrinking labor supply and decarbonization — conditions that will lead to a shift from asset price inflation to goods inflation. Profit margins and highly valued stocks will face continued pressure. Because I expect generally higher inflation during this period, I want to steer clear of many of the fast-growing, primarily U.S. companies that were the winners of the previous cycle.

Market leadership often changes after a bear market

Sources: Capital Group, MSCI, Refinitiv Datastream. Returns shown are from the MSCI USA Index and are absolute total returns in U.S. dollars. For the tech bubble the dates represented are December 31, 1996, to March 31, 2000 (before bear market), and September 30, 2002, to December 30, 2005 (after bear market). For the global financial crisis the dates represented are December 31, 2003, to September 28, 2007 (before bear market), and March 31, 2009, to December 31, 2013 (after bear market).

When cycles shift, market leadership changes. In today’s rising rate environment, I am focused on opportunities in lower-priced companies that generate strong cash flow. I am generally staying away from the cool kids of the last decade — glitzy tech and media companies — and looking for opportunities among the unpopular kids in those industries that were hurt by the low cost of capital, poor capital allocation and adverse regulations. Some examples here might include leading telecom companies in markets like Europe, Mexico and Japan.

First, it’s important to recognize that things have changed. What used to work for stock picking won’t work in the same way, possibly for years. Holding the best companies with the best growth stories seemed to be a good approach over the past 10 years.

But I believe the last decade was too easy. Going forward, it will likely be harder to generate good returns, and the factors that drive returns most likely will change. For example, you can no longer buy and hold the fastest growers without regard to profits. I see this as a welcome return to fundamentals.

You may hear the current decline described as a correction of high-multiple growth stocks. While this is generally true, it is incomplete. The stocks that have fallen the most all had fundamentals that disappointed versus expectations. Stocks with continued good fundamentals have held up better.

A lot of stocks have plummeted, but that doesn’t mean they are all bad investments. Consider this example: In the 2000 bear market, both Amazon and Pets.com declined more than 80%. Pets.com went on to become a poster child for irrational exuberance as its stock went to zero. Meanwhile, Amazon went on to become … Amazon.

For me, it’s time to get out a clean sheet of paper, focus on the fundamentals and concentrate. Separate the wheat from the chaff.

One observation over my career is that when there are regime shifts in the market, the stocks that represent the former leadership can take a long time to recover. Rotation away from the dominant companies can go on much longer than you think it can or should.

In the late 1990s to early 2000s, some of the largest tech stocks went down 80% or more and stayed down for five to 10 years. And these were the strong companies that survived; many others went to zero. You needed a very strong stomach to hold on through this period. It took almost a decade for tech to regain market leadership again. In such periods, you must consider that something has changed beyond just the valuation for these former leaders. Usually, the valuation corrects first and the fundamentals follow.

So how am I thinking about investing in today’s environment? I believe that we are experiencing “climate change” in the market, not just a passing storm. We need to avoid anchoring on past growth rates, profit margins or stock prices. Given the high level of uncertainty, I focus primarily on “supertankers” — dominant companies in their industries that generate solid cash flow, have strong competitive moats and can fund their own growth. I am investing more sparingly in what I would call “moonshots” — higher risk, higher reward companies that are more volatile — because in a rising interest rate environment, investors are less forgiving on valuations for more speculative companies.

I try to hold companies with reasonable, understandable valuations on near-term earnings and cash flows. Some examples include leading managed care providers or device makers in the health care sector.