Business

Conditions are ripe for a deep bear market


With S&P 500 briefly on Friday, down 20% from the January peak, it is tempting to start trying to call an end to the sell-off. The problem is that there is only one of the conditions for a protest to be put in place, and that is that everyone is scared. That nice work to determine when 2020 will begin to recover, but this period may not be enough.

Other requests are that investors begin to see how the challenges are overcome and policymakers begin to help. Without those, the risk is a series of bear market rallies that don’t last, hurting dwindling buyers and further damaging investor confidence.

That confidence is inherently weak. Sentiment surveys show fund managers (surveyed by Bank of America), private investors (American Association of Individual Investors) and financial news releases (Investors Intelligence) ) was in March 2020 grant Be careful about stocks. Options that protect against a market drop have also fallen out of favor since then. And consumer sentimentAs measured by the University of Michigan, it’s actually worse than it was then.

In 2020, that should be more than enough, because central bankers and politicians alike are scared. When they come in it helped investors see that, with government support, companies could make it through.

This time the central bankers fear is not because of the market drop or the economic outlook, but due to inflation. Sure, if something big happens in the financial system, they will focus on finance and the recession might make them rethink rate hikes. But for now, inflation means falling stock prices are seen only as a side effect of tighter monetary policy, not as a reason to cite. “Fed put” and rescue investors.

There’s nothing magical about a 20% drop, the usual definition of a bear market. But it adds up a lot: Over the past 40 years, the S&P 500 has bottomed out with a 20% drop or peak-to-trough four times, in 1990, 1998, 2011 and 2018. Four more times. suffered much greater damage, as the panic actually took hold.

The common factor in the 20% drop is the Federal Reserve. Each time, the market bottoms out as the central bank eases monetary policy, with the stock market slump perhaps pushing the Fed to consider more serious threats that could follow. out.

My concern is that this time could be like 1973-1974. As then, the country’s primary concern was inflation, as it was related to the war oil price shock. Just like then, the inflation shock comes when the Fed makes interest rates too low given the size of the political stimulus to the economy. Just like then, popular stocks — Nifty Fifty, now FANGS and related acronyms — have skyrocketed in the previous years.

Most importantly, in 1974, the Fed continued to raise interest rates even during a recession because it was running to catch up with inflation. The result was a terrible bear market interspersed with soul-destroying temporary rallies, two out of 10%, two at 8% and two at 7%, each of which was scrapped. It took 20 months before the bottom was reached — no coincidence, when the Fed finally started getting serious about cutting rates.

The timing hasn’t been bad for stocks so far, especially since the economy isn’t in a recession. If inflation falls, the Fed won’t need to raise rates as much as it has indicated, which would be a Great benefit for the stocks that were hit the hardest.

I remain hopeful that the economy will prove resilient, although it will be a long time before we know enough to make it a good bet. To put it really simply, however, after the stock doubled in two years, the market fell than more than 20% seems perfectly reasonable.

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Write to James Mackintosh at [email protected]

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Appeared on May 23, 2022, print edition titled ‘Conditions are ripe for a deep bear market.’



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