How the 4 Dimensions of Risk (4D) Rating Identified Risk
Before Every Major Downturn of the Last 25 Years
A rating that works only in calm markets is not a risk tool. The test that matters is what happens when markets fall — which stocks protect capital, and which ones don't.
Over four distinct bear markets spanning 2000 to 2022, ERS applied its 4D rating to the largest 2,500 U.S.-listed companies at each market peak. The question was simple: did the 4D rating identify, in advance, which stocks would suffer most?
The arithmetic answers the question.
The dot-com crash erased more than $5 trillion in market value as technology valuations built on speculation rather than earnings collapsed. The S&P 500 fell 49% peak to trough. Investors holding high-rated stocks — companies with sound fundamentals before the crash — did not just lose less. Many gained.
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The 2008 financial crisis was systemic — a collapse of the credit system that impaired even fundamentally sound companies. No rating protects against a complete freeze of the global financial system. But the 4D still distinguished which stocks would fall farthest and recover least.
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The 2022 bear market was driven by the Federal Reserve's aggressive rate-tightening cycle following pandemic-era stimulus. Rising rates punished high-multiple, speculative, and cash-burning companies — precisely the profile the 4D is designed to identify. The S&P 500 broke even over two years; the difference between what you held determined everything.
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Four bear markets. Four different causes — a speculative bubble, a credit collapse, a pandemic, a rate cycle. In three of the four, the 4D rating identified in advance which stocks would fall farthest and recover slowest. In the fourth, an exogenous shock overwhelmed all fundamental signals equally — and even then, the fundamentals reasserted themselves within two years.
This is not a backtest optimized to a single market cycle. It is the same rating applied consistently across 25 years of data, measured at each market peak, against the largest 2,500 companies in the U.S. market.
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Average 2-year return, highest-rated vs. lowest-rated stocks, at each market peak.
Universe: largest 2,500 U.S.-listed companies by market capitalization.
The COVID crash was an exogenous shock — a global pandemic that struck sectors based on physical exposure, not financial condition. Companies rated highly by the 4D tended to be in sectors that were hardest hit: travel, hospitality, and consumer-facing businesses with strong fundamentals but no immunity to forced closures.
The peak-to-trough collapse from February 19 to March 23, 2020 — 33 days — shows this clearly. Higher-rated stocks fell more than lower-rated ones. The 4D rating does not measure pandemic exposure.
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What the rating did predict was financial resilience. By the end of 2020, A+/A-rated stocks had recovered to essentially flat (−1%) while F-rated stocks were up 35% — a figure that reflects the speculative rebound in low-quality names that characterized 2020's recovery, not underlying business performance.
COVID is included here for completeness and transparency. It is the one period in 25 years where the 4D rating did not predict near-term crash severity — because the crash had nothing to do with the factors the 4D measures.
Past performance is not indicative of future results. See full disclosures.
Bear market analysis covers the largest 2,500 U.S.-listed companies by market capitalization at each measurement date. Market capitalization thresholds vary by period to reflect equivalent size tiers at each date. Returns shown are simple price returns, equally weighted within each 4D rating bucket, and do not reflect dividends, transaction costs, or taxes. Past performance does not guarantee future results. The 4D rating and all component systems are proprietary to Equity Risk Sciences™.
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