We are now 253 days into the current bear market that started on January 3rd of this year. So the big question is when will it end? According to Forbes, bear markets on average last 289 days or a little over 9 months.

This means that we are likely much closer to the end than the beginning. A bear market, defined as a 20% pullback from the recent high, is considered to be over when the market gains back the losses and goes on to make new highs.

On the flip side, bull markets in general last on average 995 days or close to 3 years.

So what has caused the recent downturn? The two main culprits are inflation and rising interest rates.

The recurring theme of the past two years has been supply chain disruptions from the pandemic that have led to higher prices across the board from buying a tank of gas to filling up the pantry with groceries. We’ve all seen the price of everything go up quite a bit.

In 2020 the government took emergency measures to shore up the economy by spending trillions of dollars, issuing stimulus checks and offering forbearance on student loans.

The Federal Reserve slashed interest rates to zero and actually started buying bonds through quantitative easing to keep rates as low as possible. This helped save the economy from entering a major downturn but they likely went too far causing inflation to spike.

The war in Ukraine that started in February added fuel to the fire as the entire Russian economy and supply chain were largely cut off from the western world due to sanctions. This led to skyrocketing energy prices which makes everything more expensive.

This Time is Different

This bear market is a strange one and unique in a number of ways. First off, the Federal Reserve, which controls interest rates, has been lagging in their monetary policy. The Fed was largely in inflation denial last year as the economy recovered from the pandemic. Inflation climbed from 1.4% in 2020 to 7% in 2021.

*Source: The Federal Reserve Bank of Chicago*

The Fed messaging was that inflation was “transitory” and kept interest rates at 0 for all of 2021. They finally changed their tune in March of this year by hiking interest rates .25% after inflation was already running hot and over 9%.

In the past, the Fed has been much faster to hike rates as inflation starts to take off in order to maintain price stability. The Fed has clearly failed in its dual mandate of targeting maximum employment and a 2% inflation rate year over year.

Most bear markets also coincide with a major slowdown in the economy led by lower than expected corporate earnings and high unemployment.

However, this time around, corporate earnings have actually been fairly strong. We did have back to back negative GDP numbers which is indicative of a recession but this was after very high GDP in 2021 as we recovered from the pandemic.

Strangely enough, the job market has also been very resilient. In past recessions and bear markets we’ve had double digit unemployment rates. The US had over 10% unemployment during the financial crisis in 2008. This time around we are at 3.7%. One of the problems is that employers can’t find enough qualified workers to fill roles which has led to higher wages and more inflation.

The Federal Reserve refused to increase interest rates even though we had record low unemployment, the highest GDP in 37 years and massive speculation in the crypto/NFT marketplace. They incorrectly believed that the economy was too fragile to hike rates.

However, now that inflation has started to subside, the collective market is worried the Fed may be making another mistake by hiking interest rates too high. The problem is that they are relying on lagging indicators such as CPI instead of leading ones like commodity prices, housing permits and inventory levels.

The good news is that there are signs that inflation is finally starting to taper off. The hot housing market from the past two years has finally started to cool, commodity prices have dropped significantly over the past three months, and even the strong labor market is starting to show cracks. Walmart and Target have both reported surprisingly high inventory levels as consumers have downshifted their spending.

Bizzzaro World

Here we enter Bizzaro World. Sometimes in the world of investing, good news is actually bad news. We are seeing that with unemployment as the Fed is actually hoping that the unemployment rate ticks up.

When the labor market is tight like it has been over the past year, then employees can demand higher wages which contributes to more inflationary pressure. The market is looking for goldilocks data — meaning that things are trending down but not too badly.

Sustainable Investing

Okay, so what’s good in the world?

There are some positives over the past month or so that I want to touch on. The Democratic led Congress was able to get Joe Manchin onboard to pass the Inflation Reduction Act, which is the biggest climate bill ever passed by the government. It is smaller than the Green New Deal but still includes $369 billion to spur on investing in solar, wind, battery storage, clean manufacturing, and nuclear energy.

This has helped the clean energy portfolio outperform the market so far this year. Clean energy, which represents a significant portion of Impact Fiduciary’s equity portfolio, is up over 10% year-to-date while the market overall has contracted over 17% during the same period.

More importantly this is great news for fighting climate change and will help the US lead the world to transition from our dependency on fossil fuels.

Impact Fiduciary’s Take

The issue now is that if the Fed hikes rates too far then they will likely cause a major recession and ultimately have to cut rates sooner in order to stimulate the economy. Unfortunately for us, the Fed was late to the party and is now refusing to leave.

Cutting rates can supercharge various asset classes, especially the ones that are more reliant on growth such as technology companies and companies with high price to earnings ratios. However, it can also lead to rampant speculation which is what we’ve seen over the past two years with the meme stock mania, cryptocurrency and NFTs.

My view is that the Fed is really just talking a tough game in order to help lower expectations but will likely take a more data dependent view and accommodative stance when it comes time to actually hike interest rates over the next few meetings.

Investing in a bear market is never fun. However, this does present some really good buying opportunities if you can zoom out and look at investing through the lens of a long-term perspective. Historically, if you bought into the general market during a downturn, then you have always made above average returns as long as you stayed invested for at least a few years.

Are We There Yet?

Inflation, the pandemic, record heat waves, supply chain issues, the war in Ukraine, bear markets. Will things ever improve? This has been a tough couple of years but I’m optimistic that things will take a turn for the better because humanity tends to march towards progress.

Here’s to hoping that the surprise over the next couple of years is that there are no more surprises. As always, thanks for reading!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.