Pandemic V Inflation...
In early 2020, the onset of the C19 pandemic sent a sudden shockwave through markets, sending stocks plummeting by more than 35% in only 34 days. While deflation was a concern during the pandemic, as sellers lowered prices to attract scarce buyers, the Fed’s push against post-pandemic inflation ushered in the current market downturn. Though stocks lost more at their lowest during the pandemic as compared to the loss of over 27% at the most recent low last October, the current downturn has lasted much longer.

Lower or Longer
While it took just 34 days for markets to reach their low during the pandemic, there were 282 grueling days of declines to reach last October’s lows. With an additional 111 days since the October low, there have now been 393 days since markets peaked more than a year ago in January of last year. In terms of duration, the Fed’s efforts to quell demand to thwart inflation have dented markets longer than C19. It took less time for stocks to recover during the pandemic slump than it took to reach a possible low point of the current dip, with just 260 days passing before stocks returned to and remained above their pre-pandemic peak.

Long Horizon
Though recent losses have been deep and long-lasting, the overall market has so far remained above its pre-pandemic mark, and longer-term returns may be different. Market downturns are a regular occurrence, with the overall market having lost more than 10% of its value five times in the last eight years. As predicting the onset and end of stock slumps with consistency is unlikely, having a long-term time horizon can be a good strategy for the average retirement investor. For example, despite the current slump, investments made in the overall stock market five years ago would have yielded a nearly 60% gain. Investments made ten years ago would have grown by more than 150%.

Cooling Price Pressures
Though inflation spiked above 3% by June of 2021, markets seemed less than concerned, rising more than 13% from then until the end of the year. It wasn’t until the Fed recognized inflation was not going to be temporary that markets started to creep down, as a guessing game began of how much rate hiking the Fed would do. Even though there is still far to go to reach the Fed’s target rate of 2%, recent economic data has shown the highest inflation in decades is starting to recede. It seems that a light at the end of the hiking tunnel is now at least somewhat visible.

Possible Soft Landing…
The labor market has remained remarkably resilient despite the highest interest rate hikes from the Fed since the 1980s. If the workforce can remain intact while the effects of the Fed’s hiking campaign continue to work their way through markets, it may be possible for inflation to fall without denting demand so much the economy loses jobs. While 2022 faced the highest inflation and steepest Fed rate hikes in four decades in addition to the outbreak of war in Europe; in the wake of a global pandemic that shredded supply chains, hopefully, the chances of anything more surprising happening for markets in 2023 are slim.

February 1, 2023