Macroscope | As US stocks fall, a bear market is all but inevitable in 2022
- After years of rising prices, the US stock market is on the brink of a long-term shift from bull to bear
- While some investors insist the recent fall in profits is purely corrective and continue to buy the dip, the reality is that greed must soon give way to fear
Greed and fear are primal instincts, and greed has been red in tooth and claw in battling against fear during what amounts to the longest ever bull market in stocks. But fear, too, is powerful, and the smell of it is pervasive now as the rules of engagement change.
The great bull market on Wall Street and elsewhere roughly coincided with the adoption of quantitative easing by the US Fed and other central banks in the wake of the 2009 global financial crisis. The bull came roaring in with quantitative easing and is now about to exit, bloodied and bowed.
There has been little need for caution during the bull market. Investors could afford to jump off a cliff in taking risks knowing that the Fed’s parachute would slow their descent until a thermal updraft of monetary warm air or fiscal stimulus lofted them back up again.
The parachute, the updraft of air and even the safety net have gone now. This fact has not fully dawned and there are still many who are ready to make a suicidal leap into the dark. Faith in the “cult of the equity” will no longer guarantee them a safe landing, however.
There are plenty of rational reasons stock prices should finally resume contact with reality – but before coming to those, it’s worth thinking a little more about the role of greed and fear.
Markets are often said to “climb a wall of fear” on the way up, pausing now and then for breath until greed drives them upwards again. But when a fall begins, gravity takes over, panic sets in and a hard landing becomes inevitable.
