Forward View: Notes on a Global Bear Market

Forward View

Notes on a Global Bear Market

September 27, 2022

The first few months of inflation can be fun... prices go up, stocks are soaring, and everyone seems to have more money. After everyone goes to bed, we wake up and wonder "what happened?"

The markets are a complete mess right now. And the Federal Reserve is doing its best to clean things up. It is a tedious and necessary chore.

Last year, everything went up... real estate, bonds, stocks, crypto. This year... everything is down (some things more than others). Aside from oil stocks and cash, there was no place to hide. This is truly a bear market for almost everything.

Comparatively speaking, dividend stocks have been a "safe space" - or at least better than many bond funds. We've been skeptical about the bond market since last year.

Meanwhile, some segments of the stock market have collapsed. For example, the Nasdaq 100 is down over -31%. The time to sell and raise cash was last December. This is not the time - we are much closer to the market bottom than the top.

Here are my notes on the current situation:

1) We've seen interest rates like this before.

Interest rates on mortgages are now above 6% and real estate prices peaked in June. I'm hearing more stories about home purchase deals not closing and buyers getting cold feet.

Looking at the big picture, 6-8% mortgage rates are historically normal. I'm not expecting a crash for housing... but prices are going to be stagnant for a while.

2) History repeats itself, but things are better now.

It feels a lot like the 1970s again. Inflation is back and geopolitical tensions are high.

But were are in a much better place. Unemployment is a mere 3%. In the 1970s it was 6-7%. Interest rates were MUCH higher.

3) The Federal Reserve created this mess; they will clean it up.

We can't blame inflation on oil prices (which are at the same levels they were a year ago), supply chain issues, or the Russian invasion of Ukraine.

The reason why we have inflation today is because the Federal Reserve and the U.S. Government over-stimulated the U.S. economy during Covid. The amount of money in the system is 30% higher since January of 2020. All that cash needed to go somewhere - and it went into higher prices for just about everything.

4) Cash yields are getting worthwhile

Some of the safest investments are finally worth holding. Rates on money market funds, savings accounts, and CD's are all better than they were just 3 months ago.

These are only a short-term solution as long as inflation remains high.

5) Market worries will pass

Vanguard recently issued a forecast of 5% annual returns for the stock market over the next 10 years. This is not very exciting, but still much better than what we saw during 2000-2010.

When will things get better? We are still in a high-risk period for the market. From a cyclical perspective, my best guess is that stocks may start to stabilize by the end of October. This coming spring, I'd expect things to feel much more "normal" again.

And a little more normal is sounding good right now.

Jim Lee, CFA, CMT, CFP

Founder, StratFI

Subscribe to Forward View

Disclosure: Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Securities listed herein are for illustrative purposes only and are not to be considered a recommendation. The author may personally hold positions in securities mentioned.