The End of the Everything Bubble
by Zach Marsh on Sep 23, 2022
What a difference a year makes. But I don’t need to tell you this. Anyone who’s gone through the last few years knows this to be true. Since, 2018 we’ve seen our share of whipsaw action in financial markets—from Christmas Eve stock market collapse in 2018, to Covid crash in 2020 followed by the Covid market explosion in the second half of 2020, to the meme stock insanity of 2021, and finally the bear market of 2022.
During the last four years, the Nasdaq 100 and S&P 500 have seen three separate declines of greater than 20%. But in terms of being emotionally deflating, this most recent one takes the cake. In 2018, it took nine months for the market to sell off and recover. In 2020, the market sold off 35% from February to April, but recovered it all by August. This year the market the S&P 500 sold off 23% from January to June, and after staging a recovery attempt in July and August, here we are again back to the June lows. Nine months into this bear market and we seem to be far from a stock market recovery that takes us back to the highs. Bear markets eat away at time as well as value.
Complicating matters is the fact that 2022 has been a bear market for nearly all investible asset classes. If you can name it, it’s probably down. Here is a recap of year-to-date performances:
- S&P 500 -22.76%
- Nasdaq 100 -31.23%
- Russell 2000 -25.25%
- DJIA -18.57%
- Gold -10.47%
- IEF (10-year US bonds ETF) -15.32%
- TLT (20+year US bonds ETF) -28.00%
- MUB (iShares Muni bonds ETF) -10.13%
- HYG (iShares High Yield ETF) -14.54%
- GSG (Commodity ETF) +19.81%
Only commodities are higher this year, but this hides the fact that even GSG the commodity tracking ETF is down over 20% from its high in early June. Wherever you look it is a sea of red and a house of pain. As you probably are aware, this carnage is a result of a Federal Reserve policy shift from zero interest rate policy to a policy designed to curtail inflation. As recently as last year the Fed was telling us that inflation was transitory, now they are telling us it is persistent. At this stage we have to begin to doubt their ability to see very far into the future.
One year ago, the yield on the 2-year US Treasury bond was less than 0.25%, now it is closing in on 4.25%. This week the Fed raised the Fed Funds rate another 0.75% and told us all that more was on the way. All of this would be easier to digest if it weren’t delivered by the same people who got us in this jam in the first place. Leave it to bureaucrats to create problems only they can solve. I guess that’s why they won’t be the ones queuing up for unemployment when this is all said and done. Which is precisely what they are trying to create/prevent by attempting to navigate the economy down from its massive sugar high caused by years and years of easy money policies.
It is difficult to say when the relentless downtrend in asset prices ends. I would like to believe that given the nature of the carnage that we are closer to the bottom than the top—at least when it comes to broad-based asset price declines. While it never pays to fight the Fed, it also is not wise to rely upon the Fed’s ability to predict even their own actions more than a few weeks into the future. While Jerome Powell asserts that rate increases will continue into the first half of next year, should assets fall much further I see that as highly unlikely. Perhaps when the Fed does pivot their policy the damage will not be too extreme for them to engineer a rebound, but that too remains to be seen.
Thanks for reading,
Zach and Dave
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