History cannot tell us much about whether the stockmarket will continue to slide in 2023—but it does offer a couple of clues
come in all shapes and sizes. Since the 1950s there have been 11 of them. The shortest, in 2020, lasted a single month; the longest, from 2000, more than two and a half years. From peak to trough American stocks’ worst decline began in October 2007, a whopping 57% slide, as the financial crisis set in. The shallowest was in 1990, just a 20% dip, in response to a mild recession.
The nastiest, most prolonged slumps in financial markets have generally occurred when the slump in asset prices helps reveal that a slew of financial misdeeds were taking place when the going was good—such as the savings-and-loan crisis of the 1980s or the mortgage-backed security problems of the mid-2000s. A bad asset cycle then sets off a period of deep economic pain as consumers cut back and companies lay off workers as their profits shrink.
Will the bear market endure into 2023? The going was pretty good in the run-up to it—the roaring bull market of 2021 was unwavering. The500, the leading index of stocks, hit new all-time highs on 68 of the 252 trading days—in only one year, 1995, did it reach more new peaks. There were clearly bubbles inflating in crypto assets, such as non-fungible tokens, and novel financial instruments calleds raised absurd amounts of capital.
Will this slump reveal widespread financial transgressions? If it does, you will soon know about it. It was only a year after the market peaked in October 2007 that Lehman Brothers went bust. And weaknesses in the financial system are already starting to appear.British pension funds were imperilled in September 2022 by margin calls on some bond derivatives they held. Volatility in the American Treasury market has spiked.
What about the depth of the economic pain? That is unclear. If deep pain is on the horizon it has yet to show up at all—America’s unemployment rate remains at multi-decade lows, despite rapid tightening of policy by the Federal Reserve. Still, monetary policy acts with long and variable lags. It is possible to imagine that this tightening will cause a sharp contraction in economic activity once households and businesses feel its full force. Do not count your bulls until they are hatched, then.
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