In his book Winning on Wall Street, the late Martin Zweig wrote, “Don’t fight the Fed.” That saying was true in the 1980s and remains true in the 2020s.  

The Federal Reserve stimulated the economy after the pandemic, driving up prices in nearly everything that traded. Now it is removing liquidity and everything from stocks to bonds and especially crypto currencies is falling.  The S&P 500 lost 21% in the first half of the year. The Nasdaq Composite and technology stocks were worse.  

With stock market losses of over 20% the S&P 500 is in a bear market.  Dating back to 1928, there have been 28 bear markets, which means we can expect one about every five years. The average bear market lasts approximately 10 months, but that can vary greatly. The bear that began in 2000 lasted 929 days while the 2020 bear market only lasted two months.

While today’s headlines are especially gloomy, they were just as bad in 2000, 2008, and 2020. This isn’t unusual. Current headlines note that stocks had their worst first half since 1970. That’s true, but less mentioned is that stocks rose 27% in the second half of that year. Again, in 1962 stocks fell at the same pace as this year and then rallied 15% in the second half. Rallies can happen again.

Earnings and interest rates determine stock prices and the earnings outlook depends to a good degree on the economy. While some individual companies can do very well in any macro environment, as a group corporations cannot. The economy has to grow. Rising interest rates won’t help.    

The Fed will be raising rates (tightening) for the foreseeable future, if we are to believe Jerome Powell (maybe). Powell’s goal: to slow demand growth and with it inflation pressures in what is called a “soft landing” as opposed to a hard one (a recession). So how have such tightening policies worked in the past? Since the 1950s there have been 12 tightening cycles. Nine of those ended in a recession. Many economists believe we’re already there.

Don’t get too worked up about the R word. Recessions invariably create great opportunities for investors because the stock market bottoms midway through a recession and prices rally, despite the negative news background.  Stocks are forward looking so they rally long before the negative headlines end. We just need something (inflation, supply chains, etc.) to improve.  Eventually, something will.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.