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Deep bear market conditions are ripe

With S & P500 Temporarily reduced by 20% from January peak on FridayIt is very attractive to try to start calling the end of the sell-off. The problem is that only one of the conditions for the rally is in place and everyone is scared.Or Worked beautifully The timing of the start of the 2020 rebound may not be sufficient this time.

Other requirements are for investors to start overcoming challenges and for policy makers to start helping. Without them, the risk is a series of unsustainable bear market rebounds that hurt dip buyers and further undermine investor confidence.

That confidence is already weak.Sentiment Show Fund Manager (Survey by Bank of America), Private Investors (American Private Investors Association), Financial Newsletter (Investors Intelligence) surveys already March 2020 level Attention about inventory. The option to prevent the market from slumping has also been less popular since then.When Consumer sentimentAs measured at the University of Michigan, it’s actually worse than it was then.

Central bankers and politicians were also scared, so that was enough in 2020. When they step in It helped investors understand that businesses can get it done with government support.

The central bank is not afraid of market downturns or economic outlook. But due to inflation.. Indeed, if there is a major problem with the financial system, they may be refocused on finance and the recession may encourage them to reconsider rising interest rates. But for now, inflation is only seen as a side effect of monetary tightening as a fall in stock prices. “Feed put” When Rescue investors..

There is nothing magical about the 20% decline, which is the usual definition of the bear market. But it gets very big. Over the last 40 years, the S & P 500 has bottomed out four times in 1990, 1998, 2011 and 2018, with a drop of around 20% from peak to trough. There was a much bigger loss as the real panic took hold.

A common factor in the 20% decline was the Federal Reserve. Every time the central bank eased monetary policy, the market bottomed out, and the decline in the stock market probably helped the Fed take the threat more seriously than it would otherwise.

My concern is that this time it could be something like 1973-1974.Just then, thanks to the war-related, the country’s main concern is inflation. Oil price shock.. Just then, given the magnitude of political stimulus to the economy, inflation shocks occurred when the Fed’s interest rates were too low. Just then, the preferred stock-Nifty Fifty, now an acronym associated with Fang-has skyrocketed over the past few years.

Most importantly, the Fed was running to catch up with inflation in 1974, so even if the recession took hold, the Fed continued to raise rates. The result is a terrifying bear market dotted with temporary soul-destroying rallies. Two out of 10%, two out of 8%, and two out of 7% were each erased. It took 20 months to reach the lows. It’s no coincidence that the Fed has finally begun to take rate cuts seriously.

So far, this time it wasn’t too bad for stocks, as we haven’t been in a recession in particular. If inflation goes down, the Fed doesn’t have to raise interest rates as much as it shows. Great benefit For the most suffering stocks.

I still hope the economy will be resilient, but it will take a long time to get enough knowledge for it to be a good bet.Simply put, after the stock has more than doubled in two years, the market more Over 20% seems completely plausible.

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Write to James Macintosh james.mackintosh@wsj.com

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Deep bear market conditions are ripe

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