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Balancing 2008 and 2022 Thumbnail

Balancing 2008 and 2022

The last lousy year for the US economy was 2008.

There have been years between now and then that were unspectacular, but none since 2008 have been truly terrible.

At the end of 2008, the unemployment rate was 7.2%. 3.6 million more people became unemployed over the course of the year. The housing market was in tatters. We learned what “too big to fail” really meant when it came to banks and auto manufacturers. The government was scrambling.

The Federal Reserve began cutting rates in September of 2007 and finally dropped the Fed Funds rate to 0% in December of ’08 in an attempt to heat up the ice-cold economy.

Given that backdrop, it’s no wonder that the S&P 500 dropped 38.5% in 2008.

Now, lets take a look at 2022 so far.

The unemployment rate currently stands at 3.5%. Nearly 3.4 million more people are employed than at the end of 2021. The housing market has slowed, but is still in decent shape. Auto makers are catching up from supply chain issues and selling just about every car they can produce. The government seems content to let the economy keep on chugging.

The Fed began raising rates aggressively in March of this year, attempting to cool down a red-hot economy.

And given that backdrop, the S&P 500 is currently down about 23.5% for the year.

Of course, there are cracks in the economy. Inflation, as measured by the CPI, is too high. The dollar and interest rates have both strengthened at a surprising rate. Inventories have risen as consumers have gone from spending on goods, especially large electronics, to services, especially travel. Although there isn’t a consensus at this point, there are some studies suggesting the financial health of the average consumer is starting to weaken. None of those factors, individually or collectively, are as bad as what we experienced 14 years ago.

To me, the negative market sentiment has been one of the biggest factors. Take the government jobs report released on October 7th, for example. 263,000 jobs were added in the US economy in September, according to that report. Good news, right?

Of course not! The S&P 500 sold off nearly 3% that day because the economy added too many jobs.

If you squint from a distance, you can almost see the rationale. After all, a strong job market probably leads to higher wages, inflation, and additional Federal Reserve rate hikes. However, try telling a recently employed person that, as the Fed sees it, they are one of the problems with the economy. I bet it doesn’t go well.

I have been asked some version of “Could the market go down more? If so, how much?” over the last few weeks. I have no idea over the short run what the stock market is going to do – nobody does – and trying to pick the market bottom is a fool’s errand.  

What I can say is at this point, the US economy is in an entirely different place than in 2008, both in actual data and in how the economy feels. Could the S&P 500 wind up dropping 35% or more? It’s possible, but given the current data, it’s hard for me to see that happening.

Photo by Eran Menashri on Unsplash