By Edward Chancellor
LONDON- Wednesday’s sharp drop in the S&P 500 Index left the US equity benchmark within a hair’s breadth of a bear market. Over the last century in the United States these episodes — defined as a stock market decline of at least 20 percent – have been relatively brief, lasting on average less than 10 months.
In recent decades, they have also become less frequent. That’s largely because the Federal Reserve has always been on hand to bail out Wall Street. But the return of inflation changes everything. With the so-called “Fed put” off the table, the next bear market could last longer and inflict more damage than those of recent memory.
If you blinked you might have missed the bear market triggered by the Covid-19 pandemic.
It commenced on Feb. 19, 2020 and lasted just 33 days from peak to trough. The downturn was reversed after the Fed slashed interest rates and printed money to support the financial system. Now that American inflation is at its highest level in 40 years, however, the US central bank can no longer wave its monetary wand to set everything right.
The economist Richard Duncan, author of “The Money Revolution”, points out that the Fed may even welcome a market correction as falling asset prices could help push inflation back towards the central bank’s target. With short-term rates at just 1 percent, there’s plenty of room for further hikes. And the Fed will only start to reduce its bloated balance sheet next month. Duncan predicts that a trillion dollars’ worth of quantitative tightening over the next year will push up bond yields, causing asset prices to fall.
