Lin Liu
Lin Liu
Austria
3mo
A Replay of the 2022 Bear Market? This is the fifth straight down week for the S&P 500, its longest losing streak since the 2022 bear market. And the Nasdaq is now officially in correction territory down more than 10% from its October high. Unfortunately, it does look like this correction is not done yet. The situation has not improved materially, rather the opposite. What was outlined in last week’s final paragraph continues to describe the situation today. In fact, it aged almost too well. The parallels between 2022 and 2026 are striking. The parallels are uncanny. - 2022 was a midterm election year and so is 2026. - In 2022 Russia’s invasion of Ukraine sent oil from about $95 to nearly $140 in 2 weeks → Today the Iran conflict and Strait of Hormuz closure pushed Brent above $126 with oil up 37% in a month. - In 2022 the market peaked in January and then started a slow painful grind lower → This time S&P 500 hit its most recent all time high on January 28th. - Back then tech stocks led the way down and the Mag 7 got destroyed → And just like in 2022 the Mag 7 have been leading the way down ever since - Doom and gloom is everywhere on social media just like before Now it’s not been exactly the same. In 2022, the Fed was behind. Inflation had already exploded to 9.1% while rates were still near zero, and they kept calling it transitory. When reality hit, they had no choice but to react fast. Rates went from 0.25% to 4.25% in a single year. That was the fastest tightening cycle in 40 years. That is what actually broke the market. This is not happening today. Today, rates are already at 3.50% to 3.75%. Inflation is not running at 9% anymore, it is closer to 2.5% - at least for now. So, there is no rush to tighten. The good news is that once this correction is over, there will be fantastic buying opportunities. So far, the S&P 500 is now down 9%. The average drawdown during a midterm year is 16%. But some of the best 1-year returns happen right after midterm lows. Drawdowns are more common than most investors think. Most years have scary pullbacks. In fact, the S&P 500 has an average intra-year drawdown of 16% every single year. Every year. And yet, the annualized return since 1928 is +10%. Volatility is the price of admission. The index already look rough, but under the hood it’s even worse. The average tech stock is down 24.8% from its 52-week high, and most stocks across sectors are getting hit much harder than the index. The best-performing sector right now, unsurprisingly, is energy. Of course, energy stocks are doing fine. Oil closed above $100 this week. However, every major oil supply disruption since the 1970s has triggered a meaningful inflation spike. The Arab Oil Embargo. The Iranian Revolution. Iraq invading Kuwait. The Russia-Ukraine war. Every single one shows up clearly in the CPI data. Oil up. Yields up. The longer the Strait stays closed, the more damage compounds across the global economy. The most reliable bottom signal in market history is simple: wait for real panic, then buy. Every time the VIX spikes and people start calling for the end, it usually sets up the turnaround. The VIX just closed above 30 for the first time in over 10 months. Historically, when that happens, the S&P 500 has been higher 2 days and 3 months later in 9 out of 10 cases. But we’re not quite there yet. I’m still waiting for that real panic, the kind where people just give up and sell everything. That’s usually when the market finds a floor. We haven’t seen that yet, and until we do, I don’t think the bottom is in. And valuation are starting to become more reasonable too. Tech’s forward P/E has dropped from 31.7 to just over 20 in five months, breaking below prior lows and reaching levels not seen since early 2023. Its premium over the broader S&P 500 has almost disappeared, the lowest since 2019. I would not call this a bargain yet, but it has moved from expensive to fairly valued very quickly. The key thing to note is that the pendulum rarely stays in the middle. It often swings from expensive to cheap rather than settling at fair value. So where does that leave us? I’m not saying 2026 ends like 2022. It might. It might not. Nobody knows. What I am saying is the setup today is clearly better than it was in 2022, because the Fed is not the main problem this time. We have a geopolitical shock, a temporary energy spike, an election year, and a Mag 7 selloff. We had all of that in 2022 too, but back then it was layered with one more thing: the most aggressive Fed tightening cycle in modern history. That piece is missing today. Every crisis on that chart felt like the end at the moment. The Iran conflict will end up on that chart too, right at the far right, just like everything else that was supposed to kill the bull market. The Crash of 1929. World War II. The Cold War. Black Monday. The dot-com bust. The financial crisis. COVID. Every one of them looked like the end. None of them were.
Not investment advice. The author may have financial interests in the mentioned instruments.
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