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Biden's Bear Market

The S&P 500 has lost $2 trillion worth of market capitalization in 2022.

Bear market graphic

After sinking for weeks, the S&P 500 stock market index has ominously made a round trip. On the day Biden took office, January 20, 2021, the index was 3,851.85. It rose to 4,818.62 on January 4, 2022, before starting a long slide that took it below the Biden inauguration level on Friday this week.

Twenty percent below an all-time high defines a bear market. On Friday, the S&P 500 index briefly tested that bear market territory. Even after a late rally, the index remains 19.0% below its peak of 4,818.62.

Most leading stocks are well entrenched in a bear market. Facebook (Meta) is down 42.8% year to date, Amazon is down 36.9%, Netflix is down 68.8%, Google (Alphabet) is down 24.7%, and Tesla is down 44.7%.

Assume you are an investor who invested $1,000 in an S&P 500 index fund a year ago. You would have lost 6.12% and have $938.8 in your account. Due to inflation, the purchasing power has diminished by 8.3% over the year. The $938.8 in your investment account can only buy what $866.85 could buy a year ago. So, the total hit you will be taking is 13.3%.

So, who is to blame for the bear market?

The stock market's predicament resulted from the wrong fiscal policy by the Biden administration and bad monetary policy by the Fed.

We asked three leading economists to provide additional insight and multiple perspectives on this topic. Below are their explanations-

Larry Kudlow, Director of the National Economic Council during the Trump Administration from 2018 to 2021

Biden's policies on federal spending & energy are the root cause of high inflation, and inflation is driving up interest rates and driving down stocks. The bear market has recession in its sights.

S.P. Kothari, Professor of Accounting and Finance, MIT Sloan School of Management and Former Chief Economist at U.S. Securities and Exchange Commission from 2019 to 2021

Falling stock prices in recent weeks have become as palpable as raging inflation over the past year. Much of this has origins in President Biden's misguided policies. Trillions of dollars in spending have fueled runaway inflation, a rise in interest rates, and a bubble in asset values, which is bursting now. To make matters worse, the administration believes solutions lie in excessive regulation, choking off oil and gas exploration, raising taxes, unchecked immigration, deemphasizing meritocracy, and dancing with rogue regimes of Venezuela and Cuba. All these snake-oil remedies will further deteriorate the economy.

Terry Jones, Editor of Issues & Insights, a journalist who has covered the economy for 40+ years with the Investor's Business Daily newspaper

Higher interest rates, soaring inflation, shortages, lack of confidence in the economy's future, and declining GDP are all awful for stocks. Inflation, in particular, reduces real returns on income-producing assets, thereby destroying the value of the underlying assets themselves.

This is what's happening now in the stock markets. Investors big and small are liquidating their holdings of declining assets to prevent further losses. It won't end until the underlying policies that cause the problems also end. That includes wildly excessive government spending and the Federal Reserve's unparalleled lax monetary policies, which have led to a ruinous triple-digit increase in the U.S. money supply.

A recession is around the corner. The question is, how soon?

As we previously reported, Treasury Secretary Janet Yellen used the term "stagflation" in public in Bonn, Germany. Stagflation happens when slow economic growth and joblessness coincide with rising inflation.

The chart below shows the market capitalization of the S&P 500. The S&P 500 has lost $2 trillion worth of market capitalization in 2022. For every dollar loss in the stock market, the consumer tightens his spending by 3 cents. So that's another $60 billion sucked out of consumer spending.

S&P 500 Market Cap Q1/2019 to Q1/2022

The Fed pumped liquidity into the market with near-zero interest rates and its quantitative easing (QE) program. The stock market boomed when the Fed printed money and kept interest rates low. The S&P 500 gained 2,626.76 points or 120% from March 2020 to January 2022.

With Biden inflation firmly taking root, the era of free money is over.

Initially, the Fed labeled the inflation as transitory and remained in denial for some time, even when backbenchers like us disagreed and warned month after month. The Fed appeared to be too focused on employment recovery after the pandemic recognizing its dual role, mandated by Congress in 1977, of managing U.S. unemployment and inflation. The Fed allowed the party to last too long and is now behind schedule, playing catchup to save its reputation. Unemployment is still very low, but so is labor force participation, a problem confounding the Fed like never before.

In March, the Fed stopped pumping money into the system and began raising interest rates by a quarter percent. It increased the interest rate again by half a percent this month. The Fed was concerned about April's job report, which said there are now nearly two jobs for every unemployed worker.

Jerome Powell was reconfirmed as the Federal Reserve Chairman for a second term earlier this month. Powell does not want to go down as a failure unable to control inflation. So he's likely to turn hawkish. With inflation running at 8.3%, he's more concerned about it than the stock market's performance.

Radio and television pundits are obsessed with every baby step the Fed takes and fail to tell the truth that the economy needs real medicine. If you want to tame inflation, the Fed needs to increase the interest rate to at least the inflation rate. That's what Paul Volker had to do in the '80s. Today's Fed Funds rate is in the range of 0.75%-1%. But annual inflation is running above 8%. If the Fed were to increase interest rates so steeply, the result would be a hard landing and a recession.

As Terry Jones points out, where do investors put their money? Some might think they would rather be invested in cash instead of getting pummeled in the market in the current environment. But cash is depreciating by the inflation rate. History shows that the stock market has always done better over the long term, but this history does not reflect an economy nearing stagflation.

Call us a bunch of curmudgeons. We don't expect President Biden to change and are skeptical if the Fed can tame inflation. President Biden is beholden to the far-left wing of his party. He will continue to blame everyone and everything, whether it's inflation, immigration, gasoline prices, or baby food shortages. If history is any guide, the economy needs strong medicine to mend. The sugar coating that we can overcome inflation without a recession is all Pollyanna.

The voters see that they are getting hammered in a bear market and skyrocketing inflation. They work hard to make ends meet. They know where to air their grievances. As Larry Kudlow says, the cavalry is coming.

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