Written during peak 2022 volatility, CIO Erik Oros draws on Hunter S. Thompson's famous despair to frame how investors should think about bear markets, panic selling, and the long-term cost of emotional decision-making.
From the original report
Selected passages from the original publication. Historical observations reflect the report's publication date, not current market advice.
In 1971, Hunter S. Thompson released the cult classic Fear and Loathing in Las Vegas: A Savage Journey to the Heart of the American Dream, lamenting the disappointment of the 1960’s counter-culture movement and foretelling the upheaval in the decade ahead. Investors lately have been feeling much fear and loathing themselves, harkening back to the 1970s with the specter of stagflation and policy mistakes looming precipitously over financial markets.
Soaring prices at the pump, geo-political upheaval, and a Fed scrambling to amend its missteps certainly evoke the 1970s. This year, in a dramatic reversal, both the Fed and investors have jettisoned the “temporary” inflation narrative that characterized the bulk of 2021. Today, in fact, the Fed has struck a tone much like that of Paul Volcker who famously promised to “break the back of inflation” by raising interest rates aggressively. Soaring rates have brought the death of the TINA (there- is-no-alternative) narrative that provided a seemingly endless tailwind to multiple expansion, wreaking havoc on growth assets. Consumer confidence levels have plummeted to all-time lows and fund manager positioning has shifted as bearishly as we’ve seen in past decade.
Ultimately, these worries have compounded to push equities officially into bear market territory. To make matters worse, there has seemingly been nowhere to hide, with the bond market on track for its worst performance (by a longshot) since the seventies. Mortgage rates have exploded higher, as have corporate spreads, fueling fears of a looming recession.
The question therefore looms as to whether the dramatic “Fear and Loathing” we’ve witnessed thus far is warranted. The ultimate persistence of inflation and the likelihood of a US recession will without question remain the key drivers of both fixed income and equity prices. However, daunting a recession may be for markets, these sorts of pressures are well understood. An inflationary spiral however takes on a life of its own and there is nothing the market hates more than uncertainty.
For educational purposes only; not individualized investment, tax, or legal advice. Investing involves risk, including loss of principal.
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