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History Repeating Itself: S&P500 Freefall

In 2008, the S&P 500 hit an All Time High (ATH) and then slumped in a downward pennant before a ~46% freefall in price. 14 years ago, the market for mortgage-backed securities (MBS) was inflated and the market corrected for it. “The Great Recession” took years to recover. Today, actual inflation in consumer prices is plaguing the market the same way but on a much larger scale.

We can see in the chart below how the 2008 correction took place – the downward pennant, the waterfall drop in price, followed by years of small rallies to recover ATH in what became a massive, global-sized recession.

If history tends to repeat itself, then the current economic climate today should be concerning to everyone – not just traders and investors. Similar to 2008, the S&P 500 hit an ATH and has started its downward slump. The pennant alone is worrisome considering how high inflation rates have reached. The real question is whether or not we’ll experience an additional ~40% drop in the Index price in a waterfall effect like we saw in 2008.

It’s possible, but not probable. The horizontal white line from 2020 ATH demarks a cutoff before COVID-19 Lockdowns. The economic growth following the lockdowns (everything above the white line), especially in 2021, is largely attributed to what I call “fake success”.

Why is it fake success? The Feds had printed trillions of dollars, removed bank reserves, and handed out cash like it was air. Meanwhile, production had slowed – manufacturing plants across the globe were forced to shut down due to COVID exposures, resulting in supply chain issues for commodities ranging from meat in grocery stores to lumber. The inflated values we see post-COVID came from investors with extra cash (printed and handed out by the Fed) dumping it into mostly tech-related securities because there was nowhere else to spend this money.

Restaurants and entertainment were forcibly closed. Large sectors of the economy were not allowed to operate; other sectors were forced to operate at lower capacity. So the increase in equity value we saw between May 2020 and November 2021 was not organic. It came almost exclusively from the extra fiat printed by the Fed.

With the Federal Reserve increasing interest rates in attempts to curb inflation, we’re seeing a lot of that fake, inflated value placed on assets and securities like Bitcoin, Disney, and Netflix, beginning to shrink. But notice how prices for real, tangible goods and commodities – the necessities of life – have gone up: gas, lumber, food, oil, etc.

Almost every large tech company has seen a 30-60% drop in stock price. Meta (Facebook), Twitter, Amazon (which split), Netflix, and Disney are just some of the companies that saw massive downturns going into 2022. And it’s not a coincidence. During COVID lockdowns Amazon stock spiked up because stores were closed – now that stores are reopening, Amazon price is correcting. The same can be said for Netflix and Disney – with “work from home” coming to an end, people aren’t watching shows or movies from home as much as they used to. Or maybe there’s something to be said about the “woke” atmosphere plaguing tech companies overall.

This may be a summer of “pain”. The pennant has reached its end and there may be a leg down to shake out the “fake success” coming out of the last 18 months. Those who merely got lucky throwing in a COVID stimulus check on some shitcoin on Binance or Coinbase and became millionaires overnight are in for a rude awakening this recession.

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