The last time increasing interest rates made investors this nervous was in 2018 when the Federal Reserve hiked rates four times between March and December while reducing bonds on its balance sheet.
Sound familiar? The Fed’s using the same playbook this year, albeit more aggressively.
The Fed has already increased interest rates by 0.75%, and earlier this month, it said it would begin reducing the number of mortgage securities and Treasury bonds it owns beginning in June.
The “Don’t Fight the Fed” adage has contributed to a nearly 30% decline in NASDAQ stocks from the November peak. The S&P 500 has fared better, but it’s still fallen almost 20%. And Treasury bonds have gotten hard hit too. For example, the iShares 20-year Treasury ETF (TLT) – Get iShares 20+ Year Treasury Bond ETF Report is down over 23%.
The drop in the indexes only hints at the fear in the market this year, though. Many stocks have performed far worse. For example, the cryptocurrency exchange Coinbase (COIN) has fallen 84%, and fintech darling Upstart (UPST) – Get Upstart Holdings, Inc. Report has lost 92% of its value since its peak in October.
The level of pessimism is getting so high that you might be nervously wondering what to do. If the past is prologue, then 2018 suggests shopping for bargains.
Big Winners Emerge From Wreckage
It’s hard to buy stocks when everybody else is selling them, but doing exactly that has paid off time and time again, including in 2018.
In 2018, the SPDR S&P 500 ETF declined 20% from its Sept high through Dec 31, while the NASDAQ 100 (QQQ) – Get Invesco QQQ Trust Report — a tech-heavy index comprising 100 large-cap stocks — lost 23%.
Stepping into the fray back then was likely the last thing investors’ wanted to do after seeing their account balances decline by that much in just three months.
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Yet buying stocks during that painful sell-off turned out to be profit-friendly pretty quickly. For example, the NASDAQ 100 was trading at $173 at its highest point in December. If you were unlucky enough to buy at that price, you still broke even by the end of Feb. 2019 and were up 10% by April, and you’d still be up over 68% despite this year’s drop.
Individual stocks performed even better. Since their 2018 lows, Amazon (AMZN) – Get Amazon.com, Inc. Report, Google (GOOGL) – Get Alphabet Inc. Class A Report, Microsoft (MSFT) – Get Microsoft Corporation Report, and Apple (AAPL) – Get Apple Inc. Report are up 64%, 131%, 172%, and 289%, respectively. You’d still be up an eye-popping 1,137%, despite an over 40% decline since November, if you bought Tesla (TSLA) – Get Tesla Inc Report at the lows.
Those are heady returns, but they didn’t come easily.
Buying into the market wreckage takes nerves of steel and a willingness to be wrong short-term in exchange for a long-term reward.
How Do You Play the Market Now
There’s no telling what stocks will be the biggest winners coming out of 2022’s bear market, but time and time again, it’s paid off to be optimistic about America’s future.
Perhaps, Warren Buffett framed it best during the financial crisis when he wrote in Berkshire Hathaway’s Annual Letter in 2009:
“Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges” before adding, “America’s best days lie ahead.”
He was undoubtedly correct.
Since the lows in 2009, the S&P 500 is up 489%, and the NASDAQ composite is up 799%. If you’d told investors to expect those returns in March 2009, they’d likely laughed at you. Perhaps, the same is true now.