It was the worst first four months of the year for the stock market since the 1970s! No, the 1930s! Can’t we just say it was a really bad start to the year?
“Bad” may not do it justice. After a decline of 3.3% in the past week, has
S&P 500 index
has fallen 13% during the first four months of the year, it is the worst start since 1939. But
Dow Jones Industrial Average,
after falling 2.5% for the week, it has fallen 9.2% in 2022, its worst start since 2020. Not to be outdone,
fell 3.9% during the week, lowering it by 17% in the first four months of the year. It’s the worst start to a year ever, dating back to 1971.
For a moment, it looked like it was just going to be the S&P 500’s worst first four months of the year since 1970. No one seems to remember the ’70s as the decade that gave birth to disco, rap and punk rock, but only for inflation. It’s an easy comparison to make considering the rise in consumer prices in the United States. The Core PCE deflator, the Federal Reserve’s preferred inflation target, rose 5.2% year-over-year in March, according to data released Friday, while employment in the first quarter cost the index rose 1.4% from the fourth quarter, the biggest increase since the dataset began.
By the end of trading on Friday, sales had gotten worse and we were staring at the worst start to a year since the Great Depression.
Still, a half-point rate hike appears to be almost certain on Wednesday, with the Fed ending its two-day meeting. It “underscores how late the Federal Reserve has been in beginning to adjust monetary policy in this cycle,” writes Michael Shaoul, CEO of Marketfield Asset Management.
However, more can be learned by not only looking at the first four months of the year – just a distinctive feature on the calendar – but also the fall of all four months. Covid-19 caused the S&P 500 to fall 18% during the four months ending March 2020. And it fell 14% during the four months ending December 2018, when the market sensed that the Fed’s autopilot rate hikes pushed the economy to its limits.
Looking back, there have been 25 four-month periods since 1992, when the S&P 500 fell 10% or more, and at first glance, they do not seem to be the worst time to put money into work: the index has gained a median of 2.6% during the six months following these declines.
It underestimates both the potential risks and rewards. Ten of these declines occurred from January 2000 to October 2002 – the onset of the Internet bubble – and only four were followed by progress over the next six months. Another nine took place at the beginning and end of the 2007-09 financial crisis, with five followed by big gains. You had to catch the end of the bear, not its beginning, to make money.
Not every four months of decline occurred during a recession or even resulted in a longer fall. In 1998, the S&P 500 fell 14% due to a Russian debt default that threatened to spill over onto the global financial system before rising 29% over the next six months. The European debt crisis and the US debt ceiling showdown in 2010 and 2011 also caused double-digit declines, followed by large gains.
The point is not that the market does not keep falling. Last week’s sales of what were not terrible earnings are certainly worrying – and we do not need comparisons from the 1970s or 1930s to tell us that. BofA Securities strategist Savita Subramanian says a third of a recession has already been priced in, given that the S&P 500 is falling an average of 32% below a bear market.
If a recession occurs, it will be painful enough. We do not have to travel back in time to decades earlier to get a reminder.
Write to Ben Levisohn at Ben.Levisohn@barrons.com