Buy when there’s blood on the streets – that’s how the old saying goes. Plenty of people say it, but very few of them actually do it when the blood starts to flow. That’s because acknowledging generational wisdom is quite different from controlling our emotions and acting on it.
Surely, you’ve heard the famous last words: “But this time, it’s different…” This phrase refers to a type of recency bias in which investors tend to feel that a current situation won’t resolve like similar situations did in the past. It’s a saying that’s been appropriated by market bulls and bears alike.
For bearish-leaning investors in 2022, they might feel that the current stock market rout is “different,” meaning it won’t resolve back to all-time highs like past bear markets did. Granted, the bears have plenty of argumentative ammo, much of it 100% valid.
They can point to “sticky” inflation, labor and tech-component shortages, and the fact that the U.S. government wants to send our natural gas over to Europe even while Americans are facing sky-high electricity bills.
In case they needed more fear fuel, the Federal Reserve just came out and signaled more federal funds rate increases: 4.4% at the end of 2022, and 4.6% in 2023. Federal Reserve Chairman Jerome Powell also predicted that America’s GDP will grow at a measly 0.2% annual rate in 2022, followed by 1.2% in 2023. For comparison, the U.S. economy grew 5.7% last year.
Not only that, but Powell believes that the U.S. unemployment rate, currently at 3.7%, will go as high as 4.4% in 2023 and stay there through 2024. All of these data points add clarity to Powell’s prior comment at the Jackson Hole Symposium about the Fed’s quantitative tightening and interest-rate hikes causing “some pain” in the economy.
So now, the perma-bears have both numbers and feelings, and they can find all kinds of reasons to panic-sell their stock holdings. However, the same thing could have been said about March 2020, or March 2009. There were plenty of scary data points and predictions then, too.
Sure, it’s “different now,” but every situation is different. Each crisis is unique and involves uncertainty. What’s “different” about the current situation is that at least we have some clarity and a specific timeline from the Fed.
In March of 2020, it was utter chaos. The Federal Reserve couldn’t do anything to quell the confusion as people didn’t even understand what was happening. All of a sudden and without warning, you couldn’t get bathroom tissue or hand sanitizer at stores. Hospitals were overrun with sick patients.
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March of 2009 didn’t involve a public health crisis, but the fall of Lehman Brother and Bear Stearns was an unimaginable but startlingly real event. This wasn’t like the crash of 2000, which was limited mainly to Wall Street and the tech sector; 2008 and 2009 hit Main Street like a 10-ton truck.
This time around, if anything is actually “different,” it’s that we have the benefit of hindsight and, as I said, a timeline from the central bank that’s inducing this recession in the first place. Powell basically told us to expect more policy tightening, but also that there will be a light at the end of the tunnel eventually.
The stock market is quite efficient and forward-looking, and right now it’s factoring the near-term “pain” into large-cap share prices. At some point, though, investors will start to price in the recovery, which will commence when the Fed finally backs off.
And don’t be fooled – the Fed will tap the brakes at some point. There’s no way that Powell’s Fed will allow large-cap stock to fall too far, for too long. This isn’t 1981, and Powell is no Paul Volcker; the federal funds rate won’t be permitted to go to 15% in this political environment.
While you’re waiting for the inevitable central-bank about-face, it’s not a bad time to start accumulating shares of companies you like for the long term. Think about segments of the economy and markets that are starting to look oversold.
I’ll give you a quick hint: Take a look at gold and silver miners, as well as royalty and streaming companies. Some of them are ridiculously cheap right now, even while U.S. dollar inflation is running hot. So, I suppose that this time really is different – but not in a bad way, if you’re prepared to scoop up some terrific bargains.
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