The SP500 index hit 2000 and 1929 bubble valuations in 2018-19, then it exploded higher after the Fed pumped trillions into the market in 2020. The central banks are now pulling liquidity from the system to reduce inflationary pressures. The SP500 price turned down as this draining began.
Note: TSP Smart recommended existing equity funds and going 100% G fund in December of 2021 just prior to the top. We were one of the first to recommend the I-Series Savings Bond outside of TSP. And today we are looking at mutual funds for the MF window that will perform better than the C/S/I funds during bear markets.
The money printing tsunami not only affected financial asset prices directly, it boosted corporate profits which will now settle lower to pre-COVID trend. In the quarter just ended the SP500 Earnings Per Share (EPS) was down over 5% after taking out the energy sector’s record profits. The normalization process has already started.
Unfortunately, we will never return to the secular bull market era that was driven by 40 years of declining interest rates and globalization which lowered cost for US multinationals. The era of low inflation will be replaced with a more sustained era of inflation as industries re-shore, wage repression ends, and expenses for energy and interest rise.
The problem with sustaining financial repression (holding interest rates below inflation) is that it does not force inflation lower. It also continues to transfer wealth up the wealth chain to the top 0.1% which leads to greater social volatility and reduced economic growth. The central banks have to let interest rates rise.
Note that I said “let rise” and not “raise interest rates”. A free market demands higher interest rates for inflation risk. It is the central banks buying financial assets that repressed the natural rise in interest rates. As they stop repressing, interest rates rise.
Follow our market commentary as we focus on market drivers and how to invest for a secular bear market. It certainly is not time to buy & hope or hold lifecycle funds.
Invest safe and don’t be the turkey,
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