Markets are Tanking! What comes Next? What Should I Do?
Photo by Harry Gillen on Unsplash
Since its peak in December 2021, the S&P 500 has dropped about 34% thus far. The NASDAQ and the QQQ index have dropped about 36% and 32% respectively. After reading the book The Dying of Money, I believe our economic situation today is almost identical to that of the inflation period of the 1970s. The government printed too much money, there was an oil crisis, inflation grew to double digits, the Federal Reserve had no choice but to raise interest rates to calm down inflation, and stock prices dropped. Lessons from that time period can give us a glimpse of what may happen next and what we can do to react. In this article, I’m going to talk about:
What will happen next
In the 1960s, the U.S Government printed a lot of money. As a result, the 1970s were a decade marked by high inflation and equally high-interest rates. We can expect inflation to get worse before it improves; there’s nothing to do but let the prices of goods rise until a new equilibrium point is reached. That equilibrium point will depend on money velocity (controlled by interest rates and demand), money supply (controlled by interest rate hikes), and supply of total goods.
As the Federal Reserve raised rates in the 1970s to reduce demand and tighten the money supply, the S&P 500 dropped about 45% by September of 1974. This was 2 years after the peak in December of 1972. Given that we’re only 7 months into the current rate hikes and about 36% from the peak in the S&P, there’s a chance that there’s more room to go down. This is because the interest rates can rise further, causing a contraction of demand and a recession.
Chart from Yahoo Finance
Average interest rates peaked around 16% in 1981 and only in the 1990s did inflation begin to calm down. After the market bottomed in 1974, it was not until 1981 that the market recover to prior levels. This means that:
- Our current inflation levels may just be the tip of the iceberg. We may start to see double-digit inflation for a prolonged time.
- The market bottom hasn’t arrived yet and the S&P 500 may continue to drop due to a recession caused by high-interest rates. We may see the S&P 500 drop to 2800.
- It took about 6 years for the market to fully recover to 1974 levels. That means that we may not see 2021 S&P 500 levels again until 2030.
With current improvements in supply chains and production capabilities, we may be able to fix the supply side of the inflation much faster than we were able to in the 1970s. The OPEC Oil embargo caused a gas price spike in the 1970s much like the Ukraine/Russia war is causing. Unlike then the U.S. has the ability to increase our domestic oil production if it needed to.
However, much like in the 1970s, we will most likely enter a recession. Companies that flourished in an easy money economy will start to tighten or fail. This would mean the recession would start off as a white-collar recession as start-ups and low-profit margin companies start to tighten and lay off their workforce.
What I’m doing with my savings and my stock portfolio
Even though stocks are going down, I’m investing the same dollar amount into index funds every month. In 2021 my dollar cost averaging strategy wasn’t purchasing many shares of the funds I was investing in because of the inflated prices, but as prices drop I think that it’s a good time to acquire index funds, such as QQQ and SPY, at cheaper prices. My dollar cost averaging strategy is now buying these funds at lower prices.
Also, I’ve been asking myself whether the stocks that are in my portfolio are long-term plays: do I believe this company will provide more value over the next 10-20 years? If so, I’m holding on to them and buying more at today’s depressed prices. If not, I’m selling these stocks to book a loss that I can use for my tax returns.
My overall portfolio has a 30% hit thus far, and I don’t think it will recover to its peak anytime soon. However, I believe that the companies and funds I’m invested in are going to do well in the long term (i.e. the next 10-20 years) so I’m not worried.