We all see the ugly headlines, particularly on days like Monday as the Dow declined 440 points (1.35%), the Nasdaq Composite plummeted 300 points (2.52%) and the S&P500 declined 90 points (2.21%). Year-to-date, the Dow has lost 12%, the Nasdaq has lost 26%, and the S&P500 has blown away 17%. These major indices have round-tripped to where they were more than a year ago. The market declines have become noticeably ugly enough that mainstream, non-financial news outlets are talking about it. Let's just say there are tons of bad news, bad articles out there, like what's in the picture below.

An article from USA Today says market sees turmoil, fears spike, stocks fall, Wall Street searches for signs that this is the final washout. They talk about the relentless selling that has investors running away from stocks. The Volatility Index is up double-digit percent. The market pricing in a lot of bad potential outcomes, such as a recession, some financial crisis, and investors worry the central banks can no longer backstop the market. Oil prices falling and a slowdown in China could be signs of a global recession that could drag down the US. Horrendous and worrisome, right?

There's one problem. This isn't today's paper. This is a paper from January 21st, 2016. It isn't today's slowdown in China, it's 2016's slowdown in China. It's not today's ~$100/barrel oil prices, it's 2016's ~$40/barrel oil prices. And it's not today's Dow Jones Industrial Average of ~30,000 points, it was 2016's Dow Jones Industrial Average of ~18,000 points. 

While there are hints that we were near the end of the panic in that 2016 story, the writer painted the picture clearly: "It's still too early to say the market has hit rock bottom, but there are signs panic selling is leading a stampede out of the market that will eventually clear the way for rising prices and a recovery bounce." 

There you see, 2016 vs now. After today's marking of a 12% decline in the Dow Jones Industrial Average year to date, I think it may be good to offer a perspective, not bullish, but reflective of what was going on from a paper written half a dozen years ago. Sure enough, back in 2016, the market held it's ground, re-testing the lows a couple of times. It then ultimately went on and got a ~10,000 points rally pretty much in a straight line.

I never want to be sanguine about a sell-off, especially about this one, as the damage has clearly been very severe, especially in the Nasdaq stocks. There are real reasons for the current fear. There are 3 culprits behind this market decline: the Federal Reserve, Russia, and China. The bear case is palpable. The Federal Reserve is not breaking inflation fast enough by just talking, let alone taking a 0.75% hike off the table. Wall Street wanted the Fed to shock the system, do a 0.75% hike, fully knowing that it won't cause mass unemployment (the other mandate of the Fed) with as many job openings as we have. What it will do is push the price of materials over the edge so that Main Street can do business with lower costs and therefore high margins. 

How about Russia? Every time that we hear Putin may be ready to ease up, he hints at using nuclear weapons. One week Sergei Lavrov says nukes are off the table, the next week Putin says nukes are back on the table to scare the world from sending Ukraine the much-needed weapons. 

On China. How much longer can we be hostage to their economic weakness, caused by their hard-to-understand unwillingness to use an effective vaccine and finally get the Covid pandemic over with? The world has been through multiple waves of Covid infections, yet after each one, the vaccines prove themselves to be extremely effective. Unfortunately, China refuses to use Western-made vaccines, insisting on using their inferior, below-50% effectiveness vaccines. 

Anyone of them could put an end to this meltdown, just like what happened 6 years ago. Earning season has largely gone by, with major banks, industrials, big-cap tech companies reporting in-line results (nothing worse than feared). We mostly know what the Federal Reserve will be doing over the next 6 months. However, the market can't manage to find a bid, because we still don't know whether the Fed, Russia, or China will change their course. Funny enough, back in 2016, China ultimately changed its course by propping up its economy. The Federal Reserve decided to be less hawkish than the market was pricing in. 

The stock market is about investors trying to price in the future. We're in the process of "finding the bottom" or the price at which investors feel comfortable buying and that fairly values their outlook of the economy. Whether you admit it or not, we have been in that process since November of last year, when the Federal Reserve suddenly changed its tone towards being more aggressive on inflation. The process accelerated when Russia invaded Ukraine, pushing oil price up to multi-year high. The process got worse over the past few weeks as China locked down and stoked fears of continued supply chain disruptions and/or demand destruction.  

But let me just remind you of one thing. Take a look at the chart of the Dow Jones Industrial Average over the next 7 years after the Jan 2016 USA Today paper. You'll see that the early 2016 meltdown that was so bad, that was worse on a percentage point basis, that scared a lot of people out, that got people thinking to get out because of bear market. Well, it's barely noticeable. If I wasn't talking to experienced market experts, dig up the stories and studied the period extensively, I wouldn't even remember how the thing got started and ended in 2016.  We've got 3 big worries in this market, but we have been worrying about them for nearly half a year to this point. I believe it's time we start preparing our portfolios for something that may actually go favorable. That has been the usual trajectory of every single sell-off in history, from the small, hardly noticeable blip in 2016 to the horrific, systemic problems we faced in 2008 and 2020. Why can't this one be different?