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Federal Reserve ends bull market endorsed by influencers


FFor years, the adage “Don’t fight the Fed” meant only one thing: buy stocks. Now legions of newbie investors who have never had to deal with inflation before are learning that it can mean something else too.

Battered for months by hawkish statements from Jerome Powell, a man investors once saw as their staunchest ally, the S&P 500 ended Monday more than 20% below its latest all-time high, ending a bull run of two years among the most powerful ever recorded.

That Powell’s Fed ends up being the villainous star of the sell-off is bittersweet medicine for people who thought they had the market figured out. A booming economy, solid earnings estimates and still-hungry consumers weren’t enough for stock bulls to weather searing inflation and a determined Fed Chairman to rein it in.

The decline has been brutal for newly baptized equity enthusiasts, once armed with government stimulus checks and told to bet them for a long time, often by online impresarios and other new-wave advice givers. It turns out that investing remains a risky business, especially when central bankers change course.

“The Fed’s put is a wing and a prayer at this point,” Victoria Greene, chief investment officer at G Squared Private Wealth, said over the phone. “Investors should be prepared for more pain.”

The S&P 500 fell 3.9% on Monday after its ninth weekly decline in 10, becoming the latest benchmark to suffer a drop of at least 20%. The small-cap Russell 2000 entered a bear market in January, while the tech-heavy Nasdaq 100 did so two months later.

The decline ends January 3 in what was in many ways an unprecedented bull market for the S&P 500. At 651 days since its start on March 23, 2020, this was the shortest on record. Yet what it lacked in duration, it made up for in velocity. Its 53% annualized gains over the period were the largest on record.

Read more: Why so many tech stocks are falling

And its wealth is far from exhausted. Anyone lucky enough to have bought stocks at the low point of the pandemic is still – even after Monday’s loss – sitting on a gain that nearly cancels out 30%, whereas over the past three and five years, the yield is greater than 11%.

You can get a sense of the flavor of an era from the people it made famous. In the dotcom bubble, securities industry gurus like Henry Blodget and Jack Grubman earned regulatory scorn for their role by putting a professional veneer on what turned into a brutal judgment call for speculators. On the latest trip, it was not the Wall Street analysts but the do-it-yourself tastemakers on social media who cheered the most.

Much of this rally is due to the Fed itself, which rushed to the rescue in March 2020 after the pandemic forced shutdowns that strangled the economy. Government stimulus paid directly to households soon followed, flooding the market with liquidity in a rarely seen joint easing.

Armed with free dollars and stuck at home with no sports to bet on, many Americans have turned to the stock market, prodded by social media stars like Barstool Sports’ Dave Portnoy, who has insisted stocks won’t never go down.

The retail mania culminated in January 2021, when a dizzying rally at GameStop Corp. captured the nation’s attention, making Keith Gill, the trader known as “Roaring Kitty” a star. Day traders continued to bid frantically on a wide range of fringe and eccentric stocks in what became one of the biggest euphoric episodes in recent history.

“Those who came in at the height of this because the money was easy, because the liquidity was plentiful – it must be brutal for them,” Quincy Krosby, chief equity strategist at LPL Financial, said over the phone. “The market is very much like mother nature. Just when you think you understand mother nature, you are hit by a major snowstorm. This is the market at work.

The same stimulus package, the last cycle of which was passed in the spring of 2021, and the largesse of the Fed are partly responsible for the surge in inflation that now forces the central bank to fight hard to control it. His new role as market antagonist is unfamiliar to a generation of investors who have suffered only short setbacks.

Now that interest rates are rising, stock valuations that in some cases were approaching dot-com levels no longer make sense. As the S&P 500’s price-to-earnings ratio fell from 25 in January to 19 on Monday, the contraction in multiples accounted for the entire fall in stock prices.

Companies like Bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc. that had little or no revenue had no trouble growing in the era of easy money. Now they are crashing. In many parts of the market, from unprofitable tech companies to new public stocks, losses exceed 60% from 2021 peaks.

Cathie Wood’s ARK Innovation ETF is a notable casualty. The fund, which jumped 149% in 2020 alone, is down more than 75% from last year’s high, close to erasing all of its gain during the pandemic bull market.

“If the Fed is guilty of causing this bear market, it is by overstimulating the bull market in 2021,” said Michael Shaul, managing director of Marketfield Asset Management. “The most important thing is that you don’t have a portfolio designed to perform well in the type of environment that existed between 2011 and 2021, because that environment no longer exists.”

The army of day-traders has been slow to heed the Fed’s turn. The crowd has been buying dip after dip over the past few months even as the losses piled up. For some market watchers, a bottom may not form until they have capitulated.

While the term bear market may sound like a random Wall Street convention, it has an oddly predictive connection to the real world. Fourteen times the S&P 500 has taken the requisite 20% plunge in the past 95 years. In only three of those episodes has the US economy not shrunk in a year. Of 14 recessions during the period, only three were not accompanied by a bear market.

How far can this sale go? If history is any guide, more pain may be ahead. Since 1927, the median bear market had tended to last 1.5 years, with the S&P 500 falling 34% over the period. Of the previous 14 cycles, only three have ended in less than four months.

Matching this median decline would place a floor at 3,179, about 15% below recent index levels.

“The Fed’s easy money and government handouts of millions of stimulus checks created a huge stock price bubble during the pandemic. Now we are paying the price,” said Adam Sarhan, managing director of investment advisory service 50 Park Investments. “The crowd of wallstreetbets may have perpetuated the problem, but rather they were a symptom of a bigger problem caused by the Fed and extreme fiscal policy.”

—With the help of Isabelle Lee.

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