Editor's note: The last time the inflation rate soared in the U.S., there was no playbook to rely on. Today is different... And according to Marc Gerstein, director of research at our corporate affiliate Chaikin Analytics, that's a good sign of what's to come. Read on to find out what you should do right now to be ready for the eventual bottom in stocks...
We Have the Playbook to Curb Inflation... Here's How to Prepare By Marc Gerstein, director of research, Chaikin Analytics
We're on the "1980s Recession Clock"... That's what my colleague Pete Carmasino wrote on September 14. Back then, the country was dealing with runaway inflation. To get it under control, interest rates had to rise above inflation... for years. A lot of folks likely find this comparison depressing. After all, today, interest rates still have a long way to rise before we can close the gap. But as an investor, it brightened my day. You see, I remember all of the 1980s... I remember how we got into that mess. I remember the pain. But importantly... I also remember how it eventually got much better. The Fed is working to make things right. And by following the 1980s playbook, we'll get there. In fact, I believe it will work out even better this time. So even though the markets look grim today, let's talk about what's happening – and how to start preparing for the next "up" cycle... Paul Volcker, the Fed chair in the late 1970s throughout most of the 1980s, wasn't following an established playbook. He was improvising... Traditionally, the central bank set interest rates by decree. It didn't use the rules-based approaches like quantitative easing and tightening that it does these days. So rates couldn't rise up into the teens, for example, unless the Fed voted to do that. That all changed on October 6, 1979... Volcker's Fed announced it would manage the money supply and let rates go wherever the market took them. And by April 1980, the "federal-funds rate" reached a previously unimaginable level of nearly 20%. Here is the chart my colleague Pete shared recently. The gray bands show the two recessions. The blue line is the federal-funds rate. And the orange line is the year-over-year percentage change for the Consumer Price Index ("CPI")... The Volcker-era change is significant because it paved the way for rates to reach heights at which no Fed governor would have previously voted. It was brutal for investors. Two recessions occurred, one after the other. And the stock market plummeted. But before long, "disinflation" became a buzzword... Year-over-year growth in the CPI peaked at 14.8% in March 1980. It fell to 9.6% in November 1981. And it kept falling... By December 1982, it had dropped to 3.8%. And eventually, it slid all the way into the 1% to 3% range that we became accustomed to until the COVID-19 pandemic in 2020. Interest rates fell in tandem. And stock prices soared. Now, many details have changed since the early 1980s. But one thing hasn't... We know we can tame inflation and an overheated economy through changes in interest rates. We also learned the reverse... Through interest rates and boosting the money supply, we can escape crises that might have sparked depressions in past generations. (That's why we recovered from a stock crash in 1987 and other crises in 2008 and 2020.) Will the Fed hit its targets precisely? Heck no. Humans still run the show, after all. Overshooting and undershooting are aspects of life – perfection isn't. But we're better off than we were in 1980 in two ways... First, thanks to Volcker's Fed, we now have (and are following) an established playbook that works. Second, we jumped on the problem much more quickly this time. We didn't let inflation rise well into the double digits like in the early 1980s. We don't know when we'll escape this bear market. But we know we will at some point. So let's prepare for better days... Consider creating a "paper portfolio" to simulate returns without actually putting any capital at risk. You'll want to do that to stay fully engaged. Earnings guidance, surprises, and results – as well as the ensuing stock market reactions – will help you see that a turnaround is coming long before government economic releases. And you'll see it long before commentators start discussing it as well. If you wait until commentators say "go," you may miss a lot of the upside... For example, in the first three months after the 1982, 2000, and 2008 bottoms, the benchmark S&P 500 Index jumped 26%, 40%, and 39%, respectively. And from there, stocks kept going higher. Memories of painful losses might tempt you to distrust any signals of a recovery. Naysayers will question its sustainability. And "confirmation bias" (interpreting things in ways that conform to previously held beliefs) is real. But it's critical to stay engaged now – and for as long as it takes for the bull market to return... By doing that, you'll be in the best position to recognize the recovery as it happens. And you'll be able to jump quickly into the best opportunities. Good investing, Marc Gerstein
Editor's note: The bear market isn't over yet. This week, the S&P 500 dropped to its lowest level since June... while most "traditional" safe havens are failing. But sitting and waiting isn't the only option. Right now, you can take a specific step to shield yourself from the worst potential losses – and give yourself a chance to actually profit in the final weeks of 2022. It's an idea from two insiders in the investment world. Marc Chaikin of Chaikin Analytics and Joel Litman from Altimetry have joined forces to determine the exact place to move your money... Learn the details in this recap here. Further Reading "The stock market has a habit of punishing as many investors as possible," Brett Eversole writes. Right now, the investment pros are prepared for the worst. But their fears might not play out the way they expect... Read more here: The 'Pain Trade' Says Higher Stock Prices Are Coming. We don't know how long interest rates will remain high. But one important signal could clue us in to when the pressure on stocks is starting to ease – and that's the U.S. dollar... Learn more here: Watch for This Sign That the Tide Is Turning for Stocks. |
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