Scale of market drop is historically sharp

When it rains, it pours. 2022 is proving as much, as the bad news has been relentless.

It doesn’t seem long ago that the stock market was humming along at all-time highs, people were retiring off cryptocurrency gains and boomers were googling “what is a meme stock?”.

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But to use another cliché, all good things come to an end. I graphed the below to show the scale of the plunge in markets historically. It shows that as we turn the page on October, only four times in the last century have we seen the stock market plunge this much.

The years in question? 1931, 1937, 1974 and 2008. Anytime you’re comparing to 2008 or Depression-era years, you know it’s not a fun time.

What will happen the economy?

Anyone who follows my analysis knows that I am extremely bearish about the current state of the economy. I believe it will be a very difficult winter, especially in Europe, with so many variables against us right now, all causing a unique and scary economic situation.

We have an unprecedented amount of debt internationally, yet also rampant inflation. We have a dire geopolitical climate making it feel like 1922 rather than 2022 – with a war in Europe contributing towards a full-blown energy crisis. The dollar has already eaten up the euro, soaring past parity, and is now on track to do the same to the pound.

I won’t dig deeper into my negative sentiments, I have done that in enough pieces recently. But I also wrote last week about the boring but oh-so-powerful adage that long-term, the market trends upwards and passive investing outperforms active investing recently.

So, how do I reconcile these two apparently conflicting views? I side with the maths, of course.

Is now the time to buy stocks?

Maths is the most powerful thing in the world. Sure, I feel downright dreadful about the state of the economy, but that first chart shows how big a chunk has already been taken out of markets. This does point to an extremely nice buying opportunity in the stock market.

What do I know? Are the rambling thoughts of a boy on the Internet enough to put you off? For me – despite the fact they are my own thoughts – I’m choosing to ultimately put more emphasis on history than my own gut feel. It may hurt my ego, but if your ego comes into investing then you’ve already lost.

I got lucky thus far this year in a lot of respects. I took a long time off buying stocks for the bulk of the year as a result of my personal situation – I changed job, moved country and had a lot going on(I still had all my prior investments in there – so trust me, my pockets have been hurting).

But as I wrote in that piece mentioned above, I scaled back in recently. Obviously, this all comes with the caveat of a long-term horizon and an ability to bear the volatility. The market could crash another 50% tomorrow. But now more than ever, while it’s incredibly tempting to back myself and sit out, I’m buying another chunk of stocks.

So with the S&P 500 at $3585, 25% down for the year, I’m buying more. I believe it will be lower in future – and then I can continue dollar-cost-averaging in. For now, I’ll grit my teeth and forget about the price. Let’s revisit it in 20 years.