October 1st, 2022 | ryan tyler

How Many More Bloodbaths will markets face?

2022 has been a turbulent year for investors and markets, but there could be a lot more pain coming.

Stock exchanges around the world have been seeing significant and devastating declines since central banks started hiking their rates. After Papa Powell declared that a recession was inevitable, markets took an even larger dive, wiping out another 4% over the last two weeks of September. This came after the S&P 500 saw an overall decline of more than 10% between August 16th and September 16th. Bloodbaths like this are common during recessionary trends and they usually start to abate near the end of an official recession. For investors, a bull market is always on the horizon after a recession, it's just a matter of when.

At the moment, seasoned traders are looking at the current market situation as an opportunity. Less seasoned traders are panicking and making the rookie mistake of selling on their losses. As with any recession, stocks are on sale for most whales and experienced investors. In fact, many of the vultures and whales wait for inexperienced and middle-class brokers to panic-sell, which is what causes markets and stocks to sink in the first place. People like Jerome Powell cause bear markets by striking fear into investors. Without the fearmongering by central bankers, markets would react more naturally to recessions. On the bright side, this kind of fearmongering often ends up pricing recessions into markets before they actually happen.

In the previous recession, hints of economic trouble started showing in the S&P 500 in October of 2007. By Christmas of the same year, the official recession of 2008 was underway. Between October 2007 and January 2008, the S&P 500 sank by 18%. There was a rebound between February and May 2008, before markets went on to sink another 53% between May 2008 and March 2009. Then markets began rebounding into bull territory four months before the 2009 recession officially ended.

Overall, the S&P 500 was in a bear market for 22 months preceding and during the 2008/09 recession.

During the last recession, markets were ahead by 3-4 months. Smart analysts and investors were warning of a recession as far back as September 2007, merely by watching the trends in markets. This time around, top investors are making similar warnings—but more dire ones. Infamous billionaire, Michael Burry, sold all of his stocks in the NYSE in the second quarter of 2022, except one. Burry is notorious for making billions off the 2008/09 recession by predicting it in advance. He has been using his Twitter account to make ominous warnings since late 2021.

Mark Twain once said that history doesn't repeat itself, but it rhymes.

If this recession is going to rhyme with the 2008 recession, we can assume that it will officially be acknowledged and begin this Christmas season—based on market behaviour. Since August 18th, the S&P 500 has been on a rapid downtrend. Between August 18th and September 27th, the market dropped 15%, marking the fastest dip of the year. Since 2022 started, it has been a bear market with long-winded, progressive dips with small rebounds over several months. What happened between August and September could have been the official signal of a coming recession. If so, the recession should officially begin by mid November. It could take a full month after that for politicians and banks to acknowledge it and give it an official start date. Some might point to the 20% decline between March 30th and May 20th as the real signal, meaning we might already be in a recession.

Questions about whether we were in a recession began circulating with American GDP seeing a second straight quarterly decline in the Summer, but strong job growth led economists and the White House to believe it wasn't “officially” a recession.

If the spring market crash was the real signal, the recession may have began in July—exactly around the time U.S. GDP declined for a second straight quarter. Because it is an election year and inconvenient truths have no place among political narratives, we may already be three months into a deepening recession. We won't know the real start date until economists and investors analyze the real data after November.

We'll know the recession is four months away from its potential end when markets see strong rebounds and consistently higher resistance and support levels.

If the August crash was the real signal, this recession is only getting started. That means there could be sharper declines and bloodbaths on the horizon for markets. Regardless, even if it started in July, more steep and devastating declines are coming. Between October 2007 and March 2009, markets crashed more than 57% from their 2007 peaks. If the same happens this time, we could be looking at another 30% decline from where we are now.

With inflation barely moving after giant rate hikes, there is a chance this recession could turn into a full blown depression—in which case, we are all fucked.

Sell The Green, Keep The Red, Buy Very Cautiously

Advice for investors is tricky, but if you're holding stocks, there is no point in selling most of them now. Especially if they are in the red, your best bet is to hang on to them for the long term. It's only if you have some in the high green when selling is the better option. If you're breaking even or only in the 1% margin for profits, your commissions and fees will eat it—but selling is your choice. We know the markets will rebound eventually, it's only a matter of time. If it's a V-shaped recovery, you'll get your money back in just over a year, but if the recovery takes time, it may be longer. Stocks that are already in the deep red should be held—unless they belong to companies that are about to become insolvent.

You only lose money after you have sold a stock, but refrain from buying too much right now. Until the bottom becomes visible, you could lose more money. However, buying now is still better than having bought last month. If the market sinks another 10% over the fall, holding off is better. Until things become more predictable, it's best to be very cautious. If you're a short-seller, now might be your time to shine. If you started shorting at the beginning of 2022, you might be a millionaire by now.

Unless we swing into depression territory, most of us will fully recover our losses on stocks and equities within the next two or three years. For swing traders, there will be periodic upswings and opportunities, but the overall trend will probably be downward for a good part of 2023. If we start seeing higher support and resistance levels near the end of 2023, the news will be good and the recession will be signalling an end. If it happens sooner, that's even better. However, beware the false breakouts and fake-outs.

If 2023 ends and we're still in a bear market by the summer of 2024, the news won't be good and losses could be sustained for a lot longer than any of us ever expected.

Buy, Buy And Buy When The End Signal Emerges

When that long-awaited trend reversal emerges, it's time to start buying. It might not always be easy to confirm a solid uptrend and bull market near the end of a recession, but listen to the expert investors and pay attention to what they are doing. Is Warren Buffet being aggressive with his buying habits? Has Micheal Burry started buying again? Are some of your favourite analysts and market experts suggesting the bear market is over? If so, the bull market is coming back and the recession is about to end.

Don't listen much to the central bankers, or to the pundits and analysts who listen to them. They've been wrong this whole time. When central banks were telling us inflation would be under control by the end of 2022, the real and experienced investors and economists were saying otherwise. When central banks were preparing us for their "soft landing", people like Michael Burry were warning of severe downturns and recessions.

Only when the experienced and wise contrarians say so, or when we see the trend reversal for ourselves, should we start making bigger, long term investments again. We want to strike while the market is still down but inching into a bull run.

Recession, Depression Or Recovery

We still have no idea what 2023 will look like. There is a slight, but very unrealistic chance we may not see a deeper recession. A miracle might happen that brings inflation down, the war might end, or some magical reversal will happen somewhere that makes consumers and investors happy again. Don't bank on it, but miracles have happened before.

On the more realistic side, inflation won't abate yet and rate hikes will happen a couple more times before things show some improvement. At some point in 2023, we could see inflation come crashing down and a slight rate decrease to prevent deflation, but these are all speculation. On the bleaker side, inflation will keep raging above 5% for most of 2023, keeping rates high and lending tight.

On the really, really bleak side, we could see something that more closely resembles a depression. If the war in Ukraine rages on or gets worse, we could see some hot wars and massive shortages. As long as the war persists, we could see natural gas prices remain high, which makes heating homes during winter more expensive. Europe and some Canadians are about to experience one of the most expensive winters in history. Canadians who didn't lock in their natural gas rates last year will be in for a shocking surprise when temperatures hit freezing point. What that does to the overall economy is yet to be seen.