The SP500 started this year at 4766 points. It is already clear that 2022 will end with a “negative gain. At the moment the index is hovering around the 4,000 point mark. The loss is about 16% YtD.
If you look at the statistics, the SP500 rarely declines for two years in a row. The last time that happened was in 2000-2002. Then the index was down for 3 years in a row altogether. There was also a very dark period during the Great Depression of the 1930s, when the index (most likely referring to the Dow Jones index) was down for 4 years in a row. But back then the dollar was tied to gold, and the Fed couldn’t do QE like in recent years, so there was prolonged deflation.
Now prolonged deflation is definitely not a threat to markets. Most likely, the world has entered an era of higher inflation. And since this is the case, it is more relevant to draw an analogy with what happened in the 1970s, when the U.S. economy faced stagflation. And we see that from 1969 to 1981, the stock market closed in the negative 5 times for 12 months (see chart below, each bar = 1 year).
And there was an episode where this happened 2 years in a row in 1973 and 1974. The first year it was down 17%, and the second year it was down another 29%. Clearly, nothing is ever exactly the same. But many factors suggest that something very similar is ahead.
The year isn’t over yet, with December ahead. Unless the market fails badly during that period, a loss of about 16% for the year is not that big. And in that case, there will be plenty of room left for declines next year. The U.S. stock market is still very highly valued relative to the nation’s GDP. With the Fed’s QE remaining tight next year and the economy sliding into recession, the chances of a continued bear market are very high.
