The Historical Case for a 70% Real Stock Market Loss over 14 Years

The comments below are an edited and abridged synopsis of an article by Daniel R. Amerman

The Nasdaq officially entered a bear market in late April, with prices down 23% from its November 2021 high. These losses have continued, reaching 29.3% by May 20, 2022. The S&P 500 is now also potentially on the edge of a bear market, reaching -20% briefly on May 20, before recovering later in the day.

The Historical Case for a 70% Real Stock Market Loss over 14 Years - BullionBuzz - Nick's Top Six
Financial and economic crisis. Recesion, Depression. Flip image horizontal when things get better.

These losses are one of a cluster of economic and market problems, with the highest rates of inflation in four decades leading to the biggest one-month increase in Fed Funds rates in two decades, even as a potential recession looms.

We have seen each of these events in the past. The end results in the past were 14 years of pain for the stock markets, and up to a 70% loss for stock market investors in real (inflation-adjusted) terms.

These events should never be unexpected, and a risk-averse investor should always include them in their long-term plans. It is not time to panic, but to truly understand history, and to prepare for an uncertain future.

Amerman is not forecasting a particular percentage drop or time period. He’s not a fan of someone acting purely on predictions or forecasts. There is a lot of value in studying them, but they are inherently unreliable. To risk your financial security upon the accuracy (or not) of particular predictions or forecasts is unnecessarily risky.

It’s important to understand history, both good and bad, and the long-term historical relationships between investment classes in good times and bad times. To talk about real stock prices not recovering until 2036 or thereafter, or losses almost tripling from here forward may seem like short-term panic or extreme pessimism. But the truth is just the opposite: This isn’t about the last few months. Amerman reviews two long-term periods that account for a little more than half of the last 54 years.

When those long-term adverse periods are thoroughly understood, we can find the calm and rational long-term solutions. This is no time to go into scramble mode in a desperate search for solutions, because that process has inherent risks.

Up for discussion: Falling markets, rising inflation; high risk, but not nearly enough; and a 70% loss as a base scenario.

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