This time four years ago, Donald Trump was busy berating Jerome Powell’s golf game on Twitter, to disastrous effect for a hobbled US equity market careening towards its worst December since the Great Depression.
“The Fed is like a powerful golfer who can’t score because he has no touch,” Trump screeched. “He can’t putt!”
“He” was Powell. Just days previous, the Fed chair with no short game committed his second communications faux pas in three months when, in remarks widely maligned as tone deaf, he described the Fed’s efforts to shrink its balance sheet as on “auto-pilot.”
Trump wasn’t doing the market any favors himself. A clash with Democrats over the construction of a wall on America’s southern border presaged a lengthy government shutdown, and earlier that month, he convinced Canada to arrest Huawei CFO Meng Wanzhou, a slap in the face to Xi Jinping following trade negotiations in Argentina. (Meng was arrested in Vancouver while Trump and Xi dined in Buenos Aires).
Fast forward four years and US equities were struggling through another vexing December. Now, as then, the S&P is down three out of three weeks, even as losses are smaller. And now, as then, the Fed is engaged in a double-barreled tightening campaign, which Powell swears isn’t over, even as the hikes are obviously more aggressive.
To be sure, the comparison isn’t perfect. A solid pre-Christmas Eve session could flip the S&P positive for this week, and there are still a few sessions left in the calendar year.
A belated “Santa rally” may be less likely this year, though. Recall that December 2018 would’ve been even worse for stocks were it not for large rebalancing flows that overwhelmed an illiquid post-Christmas tape. That was, in part anyway, the result of outsized losses for stocks seen over the fourth quarter. In 2022, by contrast, stocks rallied hard in October and November, suggesting at least some rebalancing flows will favor bonds over stocks this year, if they haven’t already.
Notably, 2022 could be the worst December since the dot-com bust for the Nasdaq.
Assuming tech shares hold their losses, it’d be a fittingly depressing end to a rough year for long-duration equities. The Fed’s aggressive inflation-fighting campaign kneecapped tech and, arguably, put an end to more than a decade of US equity market exceptionalism predicated in no small part on high-multiple growth shares, which some now argue were cyclicals all along.
The 2018 parallel suggests a happy ending. Powell executed his famous pivot just four days into the new year, effectively calling time on the stock swoon before it could officially end the bull market that began when equities bottomed in early 2009.
A pivot this time around is less likely for obvious reasons, setting up the prospect of two down years in a row for stocks.
It’s worth noting that stocks rarely fall for two years in a row. As Bloomberg mentioned a few days ago, it’s only happened on four occasions: The Great Depression, World War II, the 1970s oil crisis and the bursting of the dot-com bubble.
The bad news, Jan-Patrick Barnert wrote, is that when it does happen, the second-year decline is “always deeper than the first.”
