The stock market crash has just begun and it will hurt

Add to that, and investors around the world are leaving the market as fast as they can.

It’s easy to see why. After more than a decade of pumping money into the economy, central banks have finally shut down printing presses and started raising interest rates again. Inflation has soared and will suppress demand as real wages fall. The war in Ukraine has raised commodity prices and will cause widespread deficits, while blockades in China will stop supplies of industrial goods and key components. The outlook is as bleak as ever at the last 50 years, and perhaps worse. Against this background, it is hardly surprising that investors are coming out.

How bad will it be? Historical records show that most of the hits we have already taken away. According to LPL Financial, after World War II there were 17 bear markets, or nearly bear markets, which include a 19 percent drop plus. On average, they lasted 11.4 months with an overall fall of 29.4 percent. If it’s a landmark, we’ll see another 10% drop and it’s all over by Christmas.

However, here’s the problem. Averages are just averages. Some bear markets are relatively mild (a correction of 19.3 percent in the first six weeks of 1988 was the lowest since the postwar era), while others are much more severe (a fall of 56 percent in 18 months in 2007 and 2008 was worst since the 1930s). In fact, it will probably be at the very top of the scale. That’s why. First, the record shows that the sell-off is much worse when it is caused by a recession. Of the 17 bear markets, nine were accompanied by a recession (markets predict at least two recessions for each to occur). On average, they last 15 months and decreased by 34 percent. Due to the sharp drop in consumer confidence, declining retail sales, and inflation, which has hit everyone’s standard of living hard, the recession now looks certain. The only real question is how deep it will be and for how long. This means that stocks will fall stronger, longer.

Further estimates were already very stretched. We all knew that by the end of last year many companies were heavily overpriced. During the pandemic, technology companies soared to insane levels, but when Covid went extinct, it turned out that we didn’t all want to sit at home, watch Netflix and order noodles. We love coming out of the house from time to time. The shells available, which raised hundreds of millions to buy this or that, turned out to be much smaller than the money they raised. The result? Over-promoted, frail companies that don’t have a real business model have seen their values ​​effectively collapse when the foam blows. To get back to realistic estimates, it will take a few big drops.

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Finally, the politicians ran out of ammunition. The days of the Fed Put, when under Alan Greenspan the Federal Reserve responded to a market crash with lower interest rates and additional liquidity, are now firmly behind. Central banks cannot lower rates if inflation gets out of control. Nor can we expect governments to come to the rescue with greater spending and large deficits. They have already spent as much as they can. Anyway, they will have to raise taxes to fix broken balance sheets, which will make the downturn even worse. This bear market will not necessarily be there in 2001 and 2008, when the index fell 49 percent and 56 percent, respectively.

This may not necessarily coincide with 1973 with its fall of 48 percent. But it also doesn’t look like a soft correction before stocks start going up again. There is still a lot of pain ahead – and this bear market will be big.

Telegraph, London