The Market Is Bad… But We Can Prepare for Better Days

We’ve gone back to the future…

Inflation, rising interest rates, a recession, and falling stock prices are all plaguing us right now. As my colleague Pete Carmasino wrote on September 14, we’re now on “the 1980s Recession Clock.”

A lot of folks likely find this comparison depressing. But as an investor, it brightened my day…

Yes, really.

You see, I remember all of the 1980s…

Sure, I remember how we got into that mess. I remember the pain. But importantly… I also remember how it eventually got much better.

I know the current Federal Reserve 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. No kidding.

So even though the markets look grim today, let’s start preparing for the next “up” cycle…

Paul Volcker, the Fed chair in the late 1970s and early 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%.

The Volcker-era change is significant because it paved the way for rates to reach heights at which no Fed governor would’ve previously voted. But 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 Consumer Price Index 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 the 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’ve 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 precisely achieve its targets? 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…

Use the Power Gauge to monitor cyclical and out-of-favor sectors. Also 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…

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 not trust 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 in real time as it happens. And you’ll be able to jump quickly into the best opportunities.

Sure, the market looks bleak right now. But that’s how we can prepare for better days.

Good investing,

Marc Gerstein

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