How does this decline compare to previous recessionary ones?

[audreyh1]

I don't have a model for inflation or for the economy or for the stock market. But I do keep up with market history. There was an excellent article by Carlson here about recessionary bear markets and non-recessionary bear markets: https://awealthofcommonsense.com/2022/05/the-2-types-of-bear-markets/

To date we have been down (in late September) as low as 25.2% from the SP500 peak. We are now 333 days out from the peak. The article groups bear markets as:
1) recessionary average bottom = -39.4%, 390 days
2) non-recessionary average bottom = -25.9%, 202 days

The call on whether we are in a recession can come very late in a decline and is a murky concept I think.

I don't like that the yield curve is inverted but I've not found a model that uses this to predict my market timing -- and I have really looked at this. The best predictive model I can find is a (1) declining SP500 trend coupled with (2) rising unemployment. We have met #1 so far but not #2.

So as always I'm confused but nervous.

Well it will be very very interesting…….

 

[Lsbcal]

Well it will be very very interesting…….

Yes indeed.

Forgot to add this from the May article I linked above:

Inflationary spikes don’t cause every recession but every inflationary spike has only been alleviated by a recession.

Each time inflation went over 5% in short order there was a recession either right away or in short order.

A hard landing would be the Fed raising interest rates so high to fight inflation that it pushes us into a recession.

A soft landing, on the other hand, would see the Fed raising interest rates just high enough to bring down inflation but not so much that it causes an economic contraction.

 

[MichaelB]

Well it will be very very interesting…….

 

[Lsbcal]

UPDATE: Well this isn't looking too good. Down -20% before dividends. The May low was -25%. The Vanguard 500 index fund was down -18.15% for 2022.

If history repeats and we have a recession, the next months could be hard to stomach.

 

[Montecfo]

^^^ stock multiples have compressed, but earnings declines not yet in the numbers.

But if the recent trend of modest inflation continues, earnings declines should be modest also.

I am still planning for a hard landing. Should present buying opportunities.

 

[matjung]

Please don't hesitate to update the chart quarterly.

 

[Lsbcal]

Please don't hesitate to update the chart quarterly.

I will update this as we see big changes or after a few months.

 

[matjung]

I think the main question is not if we get a recession, but when do central banks stop hiking interest rates. If inflation stayed between 3 and 5% for a few more years - how would the banks respond? Putting up rates to 6% or 7%. Or be satisfied with charging 3 to 5%.

Independent from recessions, I fear that Nasdaq 100 follows the development of the dot com bubble.

 

[Montecfo]

The dotcom bubble is not comparable to this time. That was a much more speculative time, with companies coming public with very little revenue, much less profits.

Remember companies trading based on numbers of eyeballs? Very different now.

The Fed is not projecting many more hikes. If we get a recession I expect Fed will cut.

We may have reached the highs already on intermediate and longterm rates.

 

[aja8888]

I think the main question is not if we get a recession, but when do central banks stop hiking interest rates. If inflation stayed between 3 and 5% for a few more years - how would the banks respond? Putting up rates to 6% or 7%. Or be satisfied with charging 3 to 5%.

Independent from recessions, I fear that Nasdaq 100 follows the development of the dot com bubble.

If I was king, the inflation target would be zero.

 

[copyright1997reloaded]

If I was king, the inflation target would be zero.

+1000!

It has always bothered me when people (economists, federal reserve chairmen, others) say that a little inflation (e.g. 2%) is a "good thing". It is not and eventually ends up with more inflation (as we've just seen).

One of the most prosperous growth periods in our countries history was accompanied by slowly falling prices. It makes sense, because increases in productivity SHOULD result in lowered per unit costs, which SHOULD be reflecte in lower prices (or "better" goods at the same price). We've even seen some of this in terms of computers, cell phones, TV's, and other devices (including some medial ones) which reflect more productive means of production and use of robotics.

 

[copyright1997reloaded]

UPDATE: Well this isn't looking too good. Down -20% before dividends. The May low was -25%. The Vanguard 500 index fund was down -18.15% for 2022.

If history repeats and we have a recession, the next months could be hard to stomach.

Thanks for posting and I should keep this graph printed out and pasted to my forehead as a reminder to not be in a hurry to up my equity allocation.

 

[Lsbcal]

Thanks for posting and I should keep this graph printed out and pasted to my forehead as a reminder to not be in a hurry to up my equity allocation.

Right, buyer beware.

If we do get into a recession, I'd want to do some buying when down 30% to 35% from the high. The average recessionary bear market was down 39% from the high.

 

[Markola]

+1000!



It has always bothered me when people (economists, federal reserve chairmen, others) say that a little inflation (e.g. 2%) is a "good thing". It is not and eventually ends up with more inflation (as we've just seen).

+1. That so called “healthy” inflation target means the purchasing power of one’s dollars goes to zero in 50 years, less than one human lifespan. 4% means your dollars go to zero in less than 25 years with compounding. I don’t even want to think about the math at 7 or 8%.

 

[pb4uski]

+1. That so called “healthy” inflation target means the purchasing power of one’s dollars goes to zero in 50 years, less than one human lifespan. 4% means your dollars go to zero in less than 25 years with compounding. I don’t even want to think about the math at 7 or 8%.

OMG... math is so hard.

It never gets to zero... certainly not anything like a simple 100%/2% = 50 years or 100%/4% = 25 years... it just doesn't work that way. Plus, since a key component of interest and return rates is expected inflation, 0% inflation would mean much lower interest rates.

50 years of inflation at 2%: 1*(1-2%)^50= .364
25 years of inflation at 4%: 1*(1-4%)^25= .360

 

[Montecfo]

The reason the Fed target is not zero is to avoid the scourge of deflation, which crushes economies and can become entrenched very quickly.

No one likes inflation, but it beats deflation.

 

[matjung]

The dotcom bubble is not comparable to this time. That was a much more speculative time, with companies coming public with very little revenue, much less profits.

Well, when I look at the 10 worst S&P 500 performers then it feels like dot com bubble.

https://www.marketwatch.com/story/t...as-wiped-out-more-investor-wealth-11671652315


Valuing some companies with 2 or 3 Trillion Dollars was nothing else but Speculation.

 

[Montecfo]

Well, when I look at the 10 worst S&P 500 performers then it feels like dot com bubble.

https://www.marketwatch.com/story/t...as-wiped-out-more-investor-wealth-11671652315


Valuing some companies with 2 or 3 Trillion Dollars was nothing else but Speculation.

The nasdaq was down twice as much, percentage wise in the dotcom bubble.

A similar list of decliners from the dotcom bust would feature compa
nies down 100 percent.

 

[sengsational]

The reason the Fed target is not zero is because it allows borrowing to be paid off with cheaper dollars. It's basically a tax.

 

[matjung]

The nasdaq was down twice as much, percentage wise in the dotcom bubble.
A similar list of decliners from the dotcom bust would feature compa
nies down 100 percent.

Yep, and it my opinion it is the reason why the shrinking of market values continues this year

 

[Koolau]

I knew many people who lived through the Great Depression. To a person, they would agree that deflation is much worse than inflation. Having said that, we let this inflation get away from us - apparently "wishing" it would go away. It didn't. Now we will pay the piper for a few years. The "tax" will be pretty steep.

 

[11522914]

Yep, and it my opinion it is the reason why the shrinking of market values continues this year

+1

Plenty of stocks have imploded, just like the late 90s internet craziness. Many more to fail in 2023.

https://wolfstreet.com/category/all/imploded-stocks/

Plenty of room for Nasdaq to continue its drop.

https://wolfstreet.com/2022/12/30/2...ripping-bear-market-rallies-that-got-crushed/

It really goes to show just how overvalued many stocks became and still are.

At least oil and natural gas are continuing their decline. That can certainly continue to help moderate inflation

 

[copyright1997reloaded]

The reason the Fed target is not zero is to avoid the scourge of deflation, which crushes economies and can become entrenched very quickly.

No one likes inflation, but it beats deflation.

I knew many people who lived through the Great Depression. To a person, they would agree that deflation is much worse than inflation. Having said that, we let this inflation get away from us - apparently "wishing" it would go away. It didn't. Now we will pay the piper for a few years. The "tax" will be pretty steep.

The period 1873-1896 had deflation, averaging roughly 2% annually. At the same time, real GDP grew over 4% annually. We should be so lucky as to have that "scourge". It became the beginning of the 2nd industrial revolution. Real wages in this period grew at faster rate than the prior period of inflation (1866-1879).

Remember, it is REAL wage growth, REAL GDP growth, REAL returns that matter.

But then we couldn't have people happy that they are getting a 4-5% nominal return on a treasury while inflation rages at 8+.

 

[11522914]

Here are the top 2 articles on Yahoo Finance right now

Oppenheimer Says the S&P 500 Could Surge 15% in 2023 — Here Are 2 Stocks to Bet on It

Wall Street’s Top Bear Sees Another Big Down Year for S&P 500

 

[donheff]

The reason the Fed target is not zero is because it allows borrowing to be paid off with cheaper dollars. It's basically a tax.

Yes, and since those debt payments are our debt payments, it makes sense to take them into account. I don't know what is the best figure for the health of the nation but I haven't heard convincing arguments for zero or deflationary numbers.