The worst market crash ever is in search of a cause

If you think it’s been a rough year for Europe, consider what US investors are going through. As I explained in a recent alert for Gold Stock Fortunes subscribers, this has been the worst crash…ever.

A balanced 60/40 portfolio of S&P500 stocks and US 10-year government bonds would be down 19.3% so far this year. Only 1931 (-27%) and 1937 (-20.7%) were worse.

But the year isn’t over yet…  

And, adjusted for inflation, it really is the worst year ever.

1931 saw severe deflation, which improved the real return because consumer prices fell. And 1937 saw moderate inflation. But 2022’s inflationary spike is enough to make the total return of a so-called balanced portfolio into record territory.

Throw in some tech stocks and the returns are even worse.

Of course, this is only the US markets. The UK’s FTSE100 index has performed much better. Meanwhile, the pound (along with other currencies) has fallen badly, cutting returns for investors based outside the country.

Gold has held steady in currencies other than the US dollar. In fact, in sterling, it’s up 10%, and not far from the year’s highs.

This is a vast loss of wealth in the world’s most important economy and its most important financial market. It is a collapse of truly unprecedented proportions.

And it has occurred for those seeking merely moderate levels of risk – the 60/40 portfolio of supposedly “safe” S&P500 stocks and even safer bonds…

And yet, the media is silent. The papers are empty of mentions of what has happened to the typical investor. And the financial advice industry’s best counter-argument for this debacle is as follows, according to CNBC:

“Fine, so you think the 60/40 portfolio is dead,” said Jeffrey Levine, a CFP and chief planning officer at Buckingham Wealth Partners. “If you’re a long-term investor, what else are you going to do with your money?”

“If you’re in cash right now, you’re losing 8.5% a year,” he added.

“There’s still no better alternative,” said Levine, who’s based in St. Louis. “When you’re faced with a list of inconvenient options, you choose the least inconvenient ones.”

To be honest, losing 8.5% doesn’t sound so bad compared to 19.3%…

Particularly when you remember that the 8.5% inflation losses get added to 19.3%…

And there certainly are alternatives. Although they don’t pay as well. For financial professionals, I mean…

Now I can’t reveal everything I wrote in the Gold Stock Fortunes alert. But I do want to point out a little more…

A crash in search of a cause

The most remarkable thing about the disastrous performance of US stocks and bonds is the absence of a specific cause.

So far, the severe selloff in the markets has not been accompanied by any crisis. No banks have gone bust. There has been no sovereign debt crisis. Nor has there been a mortgage default crisis.

Even in energy markets, where much of the crisis is concentrated, the bust has not really hit home yet.

This is very unusual. And I’d be surprised if we managed to escape from the most severe investment crash in history without a spectacular financial crisis that dominates the front pages of even the mainstream media.

If you’ll recall, the bankruptcy of Lehman Brothers turned a bad year into a disaster. I believe we are in the months before such a crisis.

I don’t know what the epicentre of the crash will be. Perhaps it will be Italian bond markets or a severe winter energy crisis which hammers economies in much of the world. Either way, the crisis hasn’t really happened yet. The market’s drop has been about pricing in the chance of such a crisis occurring.

As John Butler explains in Monday’s edition of Fortune & Freedom, we’re in the market’s Witching Season – the time of year when crashes tend to happen.

That’s why now is a good time to reduce your risk.

It’s especially odd that the US market has crashed so badly when the true crisis seems to be unfolding in Europe, where markets are holding up a little better. Well, some are…

A caveat worth mentioning is that timing plays a key role in the analysis. The start of the 2022 crash coincided quite nicely with the beginning of the calendar year. But such a comparison is highly arbitrary. A crash that begins in June and lasts a year would get split in two in the analysis, for example.

This is also important because the financial crisis of 2008, and the Great Depression for that matter, took many years to play out. US house prices peaked in 2006. The European Sovereign Debt Crisis dragged on for many years thereafter.

But that may also mean that the real crash of our current crisis may be yet to come.

It could come in winter, when blackouts ravage our economies.

Or in spring, when we realise that we shut down our industrial capacity to conserve energy, leaving us without basic necessities that we need to survive, such as food and fertiliser.

It could come with the political backlash against the establishment which destroyed our energy capacity. That has begun in many places around the world. But with the consequences barely beginning, it could get a lot worse.

Whichever snowflake you believe will trigger the avalanche, my point is that things have been amazingly bad in US financial markets. Either this is a buying opportunity, or the justification for the crash is about to rear its head. And, going by the fact that it’s the worst crash ever, it must be one hell of a visage.

Even in a crash like the one we’re seeing now, not every asset is getting wiped out. And some trading strategies are able to perform perfectly well, whichever direction stock markets and bond markets take.

To find out how our editors are leading their subscribers through the market wreckage, click here.

Nick Hubble
Editor, Fortune & Freedom