The standard definition of a bear market is clearly ‘arbitrary and capricious.’ There’s nothing magical about a decline of 20% that all of a sudden morphs a correction into a bear market, but we hit just such a threshold this week for the S&P 500. This process has been going on all year. First non-profitable tech/growth companies were taken out back and shot late last year. Then crypto was annihilated. Next the FANG type generals took it on the chin. And finally, energy and commodity stocks cracked this week. There’s a saying that no one wins in a bear market, even the bears.
But bear markets aren’t that unusual. Take a look at the table below. This will be the sixteenth since 1950. They aren’t fun, but one comes around every five years or so.
While the S&P 500 is down about -22% from it’s high, the average stock in the S&P 500 and the Dow is down roughly -30%.
The pain in the NASDAQ is more pronounced – the average stock is off -41% from its highs.
How Much Will Be Enough?
Of course, the immediate catalyst for breaking the -20% threshold was the Fed meeting this week. They delivered on their recent signal of a 75bps hike, the largest since 1994. The size of the hike stands out historically. Over the last 40 years, only 8% of the 65 rate hikes were greater than 0.5%, as you can see below.
Something to tell the grandkids about – “I remember the rate hike of ’22 like it was yesterday…”
At this meeting the Fed also outlined their expectation for rates going forward. We have to take this with an enormous grain of salt of course. After all, it’s only a few short months ago the Fed was telling us they didn’t need to hike rates this year. Wellllll……that was a bit off. Be that as it may, they think rates will get up to roughly 3.5% this year.
What are the odds of this?
That’s a tough one to call. Already we are seeing signs that economic growth is weakening. At the broadest level, Citi’s Economic Surprise index is showing that an unusually large number of economic reports are falling short of expectations.
More specifically, retail sales dipped in May.
The surge in mortgage rates is already weighing on both home prices and new home construction.
And leading indicators for 2nd quarter growth are now flat.
The key question is whether inflation actually moderates in a growth slowdown/recession scenario allowing the Fed to back off?
The recent fall in both crude oil and gasoline prices offers a glimmer of good news.
And maybe, just maybe, a healing supply chain could feed through into less price pressures.
But we really don’t know how entrenched inflation expectations are. What’s become very evident over the last few months is how few people truly understand the dynamics of inflation. If past relationships hold, slower growth/recession should equal moderating inflation and less need for tighter policy. Markets would ultimately welcome this as they are pricing in a lot of bad news today. But we probably should be suspect of anyone claiming with supreme confidence that past relationships still work today. Time will tell.
Charts We Found Interesting
1. The Swiss National Bank unexpectedly hiked rates by half a point to -0.25% this week. This was the first move in 15 years. Inflation in Switzerland is running at a rip roaring…..2.9%. That seems almost quaint today!!
2. Some analysts look at copper prices as a leading economic indicator – hence the Dr. Copper moniker. Prices are off roughly $2,000 from the high despite booming EV auto demand (the typical ICE car requires 51 pounds of copper – EV’s average 183 pounds).
3. Now this brings back memories. Internet Explorer was launched in 1995 – the same year Netscape went public, kicking off the tech boom of the late 90’s. Well, Internet Explorer is no more.
4. Bonus edition – most popular songs of 1995. I wouldn’t have guessed Coolio at #1.
5. This week crypto lender Celsius said it would pause withdrawals due to “extreme market conditions”. Basically, investors can’t get their money out. The company’s own crypto token, CEL, has fallen from $8 to just 30 cents. Ooofff.
6. An unprecedented heatwave is hitting Europe. Paris could hit 40C – 17C more than normal for this time of year. And while not a huge problem in the grand scheme of things, the Tour de France riders have to be a touch nervous ahead of the July 1st start date.
7. It is shaping up to be a tough wildfire season in……Alaska.
8. Now these supply shortages are getting serious!!
Have a good weekend.
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