The Bear Is Here

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We hit a milestone just recently, although it’s certainly not one we wanted to hit. The S&P 500 stock index is now officially in a bear market, down more than 20 percent from its highs. The Nasdaq, of course, has been in a bear market for some time. It is down more than 20 percent, but that is primarily technology, which is notoriously volatile. The S&P 500, which includes the largest and best-known companies across all industries, is a better indicator of market stress overall. The fact that it has moved into the bear phase signifies significant market and economic stress.

The stress is real, as we can see in the headlines. Inflation is at 40-year highs, gasoline is at unprecedented prices, we have a war in Europe for the first time in 80 years, and that is not all. This is a difficult time. If you think about it, a substantial market reaction makes sense.

Despite the very real risks out there, however, the current bear market is not really about the headlines. Rather, it reflects what is happening in the economy and in economic policy, which is related to—but different from—those headlines. So, to understand what is really happening and where we are likely going, we need to take a step back from the headlines. Let’s do just that.

First, Some Context

The current decline, while sharp, is fairly typical in market history. Similar declines often come after periods of sustained large gains, which we have had in recent years. It is normal for the market to give back some gains before resuming growth. We saw similar sharp declines in 2020, 2018, and 2011, not to mention 2008 and 2009—only to see the market recover. Declines are scary, certainly, but they are also normal and even necessary. Historically, they can be sharp but are often short, as we saw in 2020. There are no guarantees, of course. But often the sharper the drop, the quicker the recovery.

What’s Happening in the Economy?

Even if declines set the stage for future growth, that doesn’t answer the question of how we get from here to there. To determine that, we have to look at the economy itself. By understanding what is driving this decline, we can understand how it will end. And that depends on the economy itself.

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