The Standard & Poor’s 500 stock index fell into a bear market on June 13, 2022, rebounded in the summer, and then tanked again as summer ended; autumn is beginning with the fall continuing. This morning’s higher than expected inflation number may make you wonder when the post-Covid financial pain will stop.
Using history as a guide, the bad news is probably not all behind us but it’s also not so far from ending, according to financial historian Mark J. Higgins.
In a two-hour course for financial professionals, Mr. Higgins, says the post-Covid financial challenges facing the U.S. are a lot like the post-pandemic years following The Great Influenza of 1918 and World War 1.
To illustrate the point, the blue line in this chart shows the trailing 12-month inflation rate for the 37 months after the peak of The Great Influenza, and the red line shows the trailing 12-month inflation rate for the 17 months since the end of the COVID-19 peak period of quarantine in April 2021.
Twenty months after the peak in the Spanish flu, Fed tightening finally broke the back of the inflation cycle, throwing the economy into a recession.
The red line, representing the annual inflation rate in today’s post-Covid world, is approaching the pivotal 20-month mark of the post-pandemic inflation crisis a century ago.
Meanwhile, the blue bars show the cumulative interest rate increases by the Federal Reserve after the 1918 pandemic and the red bars show the Fed’s actions so far in the post Covid-19 era through today. “We are right about at the point when disinflation starts and the economy enters recession,” says Mr. Higgins.
So, what does this historical parallel mean to investors?
It means investors should expect:
1. more rate hikes by the Fed to destroy demand for goods and services before inflation is tamed. Prepare for jobs to be harder to find, new-home building to continue to slow, slower earnings growth on the blue-chip companies in the S&P 500, and continued trouble in the stock market.
2. waves of panic-driven stock selling by investors no longer able to resist dumping stocks, as losses mount beyond -25%, -30% or -35% from the all time high at the start of 2022.
Keep in mind, says Mr. Higgins, studies have shown timing when to sell and buy stocks is too hard to do consistently with reliability. He cites a 2022 study by BofA Global Securities that showed missing the just 10 best days of every decade since the 1930s would have resulted in a +22,120% total return for an investor who did not sell through the end of 2001. In comparison, missing the 10 best days of every decade in the same period resulted in a relatively paltry +60% total return, which demonstrates the futility of trying to get in and out of stocks at just the right moment.
Mark J. Higgins is a regular contributor to our articles. His book, “Becoming an Enlightened Investor,” a full financial history of the United States, is expected to be available on Amazon in March 2023.
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