My concern is that this time could be more like 1973-1974. Just as then, the primary concern of the country is inflation, thanks to a war-related oil-price shock. Just as then, the inflationary shock took hold when the Fed had rates far too low given the scale of political stimulus for the economy. Just as then, favored stocks—the Nifty Fifty, now the FANGS and associated acronyms—had soared in prior years.
Most important, in 1974 the Fed kept raising rates even as a recession took hold because it was running to catch up with inflation. The result was a horrible bear market interspersed with soul-destroying temporary rallies, two of 10%, two of 8% and two of 7%, each snuffed out. It took 20 months before the low was reached—not coincidentally, when the Fed finally began to get serious about cutting rates.
So far, this time has been nothing like as bad for stocks, not least because the economy isn’t in recession. If inflation comes down, the Fed won’t need to raise rates as much as it has indicated, which would be a big boon for the stocks that have suffered the most.
I’m still hopeful that the economy will prove resilient, although it will be a long time before we know enough to make it a good bet. In really simple terms, though, after stocks more than doubled in two years, a market fall of more than 20% seems entirely plausible.
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