April 25, 2022
It seems we’re headed for a bear market in stocks. The Federal Reserve must raise interest rates to defeat inflation, which is at a 40-year high. As a result, monetary policy will likely tighten, money will leave the market (or less will enter), and corporate earnings could suffer.
This all points to a bear market because the only true way to contain rampant inflation is to apply the economic brakes.
Interestingly, the Federal Reserve has undergone periods of extended rate raising 12 times since the 1950s. Every time, it has tried to engineer a “soft landing,” which means a gentle, non-recession economic outcome despite rising rates.
What’s the track record? Mostly failure.
In 11 of the 12 instances the Fed tried to engineer a “soft landing” since the 1950s, it has failed. Instead, the Fed forced a hard landing, where we saw economic downturns.
Of course, when that happens, the corporate earnings outlook dims, awakening the bears.
Even with a normal hiking cycle, the odds of avoiding a downturn or recession since 1950 are one out of 12 (8.3%). Plus, I don’t think anyone would characterize what’s happening now as “normal.”
And when another indicator hits – the inversion of the 2-year and 10-year Treasury yield curves – markets have gone down 100% of the time since 1950. With only about a 15-basis point difference right now, they may invert.
But investors can usually endure bear markets by sticking to a simple rule – do not buy stocks with prices below their 200-day moving averages. That is widely considered the ultimate dividing line between bull and bear. Above it means bullish, whereas below it means bearish. Buy accordingly.
Still, no matter the landing, I think we’re headed for some turbulence. Strap in folks.