With the S&P 500 falling short of its January high of 20% on Friday, it’s tempting to start trying to call a sell-off. The problem is that there is only one condition of the assembly, everyone is afraid of it. It worked well to schedule the start of the 2020 rebound, but this time may not be enough.
Other requirements are that investors begin to see a way through the challenges and policymakers begin to help. In addition, the risk is a series of beer-market rallies that are unsustainable, hurting buyers and further damaging investor confidence.
That confidence is already weak. Sentiment surveys show that fund managers (surveyed by Bank of America), private investors (American Association of Individual Investors) and financial newsletters (investor intelligence) are already on the alert level for stocks. Options to protect against market collapse have not been so popular since then. And consumer sentiment, as measured by the University of Michigan, is actually worse than it was then.
That was enough in 2020, because even central bankers and politicians were scared. When they do, it helps investors see that government-aided companies can overcome it.
This time the central bankers are not afraid of market collapse or economic outlook, but of inflation. Of course, if something big breaks down in the financial system, they will re-focus on money, and a recession may force them to reconsider raising their rates. But for now, inflation means that falling stock prices are only seen as a side effect of tight monetary policy, not a “fed put” and a reason to rescue investors.
There is nothing magical about a 20% fall, the normal definition of a bear market. But it has grown a lot: in the last 40 years, the S&P 500 has fallen four times in 1990, 1998, 2011 and 2018, with a 20% – or peak-to-trough fall. Four times more was a huge loss, because of the real panic.
The common factor in the 20% drop was the Federal Reserve. Every time the market has plummeted since the central bank relaxed monetary policy, the collapse of the stock market has probably helped push the Fed to take threats more seriously.
My concern is that this period may be like 1973-1974. At the same time, the country’s primary concern is inflation, due to a war-related push for oil prices. Just like that, when the Fed rate was much lower in terms of the political stimulus of the economy, inflation hit. Just like then, the stocks of choice — Nifty Fifty, now FANGS, and the corresponding acronyms বেড়ে have grown over the years.
Most importantly, the Fed continued to raise rates in 1974, even as the recession hit because it was about to catch up with inflation. The result was a terrifying bear market that split into soul-destroying temporary gatherings, two out of 10%, two out of 8% and two out of 7%, each dropped out. It took 20 months to reach the bottom – not coincidentally, when the Fed finally got serious about lowering the rate.
So far, this time there was nothing bad for the stock, at least not because the economy is in recession. If inflation slows, the Fed will not have to raise rates as much as it has indicated, which would be a big boon for the most damaged stocks.
I’m still optimistic that the economy will prove resilient, although it will take a long time before we know enough to make a good bet. In really simple terms, though, after the stock more than doubled in two years, the market collapsed More 20% seems to be completely credible.
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Write to James McIntosh at [email protected]
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