By Brad Singer
All major stock indices have sunk into “Bear Market” territory. The widely followed S&P 500 stock market index is now down over 20% from its peak last year. Investors are wondering – is the bottom in? Of course, nobody knows for sure. But many Wall Street watchers look at what Federal Reserve policy makers say, and more importantly, what they have done prior to other deep stock market sell offs in recent history.
Since stocks are already down 20% – 30% from their highs, how much worse could it get? History suggests bear markets can last one or two years before the bottom is found. During the 2008 great recession housing recession, stocks went down over 50% from the summer of 2007 to spring of 2009 before it ended.
During the Dot Com bust in 2000, high tech stocks got crushed by 80%. The broader market went down about 50% from the high.
In both these cases, the Federal Reserve was raising interest rates while employment remained strong, and inflation was accelerating. In both cases we had speculative bubbles burst. The internet stock bubble and later, the real estate bubble. Did we just see the Covid-19 pandemic bubble burst? This time we have inflation running out of control at 8%. This is hurting consumers tremendously as it causes paychecks to be stretched beyond their limits. Consumers are already pulling back on spending. House prices are beginning to slip. The Federal Reserve appears to be making another policy mistake by rapidly raising rates into an already slowing economy.
Unfortunately, there is only one real way to get inflation under control. And that is to raise interest rates and slow down the economy. If recent experience is any guide, the Fed has a poor track record when it comes to getting inflation under control without causing a deep recession.
Will this time be different? Not likely. As the Fed tightens the screws on the economy to bring down inflation, growth suffers. The frothiness and euphoria have been taken out of the market to this point. What doesn’t seem to be priced is a full-blown recession. Stock market bottoms are generally signaled when the investing public is panic mode and selling stocks indiscriminately. In other words, outright despair. We’re not there yet.
If you carried too much risk going into this bear market, now is probably not a good time to sell. If you have some cash, averaging your investment buys over next several months or quarters probably makes the most sense, especially when you consider what happened during the most recent deep sell offs in 2000 and 2008. Bear markets are very tricky to navigate. Don’t be fooled if the market rallies by 10% or 15% from here. History shows that these “Bear Market rallies” are typically short lived and give investors temporary solace before the overall downtrend resumes.
Brad Singer, CFA is a local financial advisor and is owner of Vail Financial Advisors, a Registered Investment Advisor in the state of Arizona. This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
