Whether markets sell down 19 or 21 percent is not that much different from a 20 percent decline, but a 20 percent sell-off is how a bear market is defined, so yesterday the S&P returned to the bear garden for the first time since March 2020 (did something happen that month?). The S&P 500 closed on Monday at just under 3,750, or down nearly 22 percent since its all-time high on January 3, 2022. It edged down a bit more on Tuesday, closing at just over 3,735. Mean-spirited types will note that all gains since President Biden took office have now been wiped out. That would have been bad news for anyone who had had to pay tax on unrealized capital gains (if you remember that idea, as destructive as it was vindictive) on stock in 2021 that they still hold now.
January 20, 2021, seems so far away. Here’s an extract from an NPR account of that day:
The Dow, the S&P 500 and the Nasdaq all hit new records as markets closed on Wednesday afternoon.
The achievement was notched right in the middle of Inauguration Day celebrations, as the Biden administration played a montage of dancing and singing across America. There just may have been some celebratory shimmies on Wall Street, too.
Turn to Monday’s reliably bleak Grant’s Almost Daily to learn that:
CME Group, Truist Financial Group, Duke Realty Corp., McDonalds and Dominos Pizza, come on down. That quintet represents the totality of S&P 500 members that managed a green finish today, with each of those four winners settling higher by less than 2%. In contrast, 87 S&P 500 constituents saw losses in excess of 6% on the session, with a dozen of those down by at least 8%.
Oh.
The sell-off (which has been accompanied by a fall in the NASDAQ of over 30 percent over the same period) has been driven by a number of factors, but, above all, by the realization that inflation has not yet been contained (on the contrary) and by fears that the Fed’s response might push the country into recession (in fact, I’d be surprised if it didn’t).
History doesn’t provide as much comfort as it might, especially to anyone soothed into complacency by the speedy bounceback after the pandemic crash (six months or so).
It has taken a little over a year on average for the index to reach its bottom during bear markets, and then roughly another two years to return to its prior high, according to CFRA. Of the 13 bear markets since 1946, the return to breakeven levels has varied, taking as little as three months to as long as 69 months.
If I had to guess (please note that we don’t give any investment advice here at Capital Matters), our current sell-off has a while to go, although like any sell-off it probably won’t be uninterrupted. One wild card is the Russo-Ukrainian war, which could make matters worse in any number of ways, but, if a resolution were found that relaxed restrictions on Russian oil and gas and freed up Ukraine’s Black Sea ports for grain and other food exports, it could ease some of the current supply shock in both fossil fuels and food. It wouldn’t bring an end to high inflation (the current mess owes rather less to Putin’s price hike ™ than the Biden administration wants us to believe), but it might blunt some of its sharpest edges.
One immediate reason for worry is that the country is being run by an administration that appears to be more concerned with finding scapegoats (‘price gougers’) than demonstrating that it takes inflation seriously. And it’s the latter that companies, individuals, and the Fed (no Fed is as apolitical as it might claim) all need to see. And ‘seriously’ does not mean proposing higher corporate taxes. That would not be a good idea in the best of times, but an attack on the supply side (which is what such a tax hike would be) makes no sense at all when supply and demand are mismatched in the way that they now are. And to suggest that those taxes should include a ‘windfall’ tax on oil companies, well . . .
NR published an editorial on some of this here.
It’s also worth remembering that we have been living through a long period in which money has been severely underpriced. Underpriced capital (including its flipside, a desperate search for return) is an invitation to malinvestment, which, as usual, has been eagerly accepted.
To borrow, inevitably, from Warren Buffet:
Only when the tide goes out do you discover who’s been swimming naked.
And we’ve had a very high tide for a very long time. The disaster in crypto will not be alone.
The Fed, which was complacent for far too long, now needs to step up with a rate hike to confirm that it, at least, is finally taking inflation seriously. To have a chance of doing that, it should hike by more than expectations, which currently appear to be rising from 50 basis points to 75. Is 100bp unimaginable? Not entirely, but, if the Fed is serious, 50 bp should be. We’ll see at 2 p.m., Eastern on Wednesday.