When the S&P 500 briefly fell 20% from its peak in January on Friday, it’s tempting to start trying to call an end to the sell-off. The problem is that only one of the conditions for the rally is that everyone is afraid. This worked well in order to determine the start time of the rebound in 2020, but that time may not be enough.

Other demands are that investors start to see a way through problems, and that politicians start helping. Without them, the risk is a series of rallies in the bear market that do not last, harm buyers and further undermine investor confidence.

This confidence is already weak. Mood polls show that fund managers (Bank of America respondents), private investors (American Individual Investors Association) and financial newsletters (Investors Intelligence) are already wary of stocks in March 2020. Since then, options that protect against falling markets have also not been as popular. And consumer sentiment, as measured by the University of Michigan, is actually worse than it was then.

In 2020, this was enough, because both central bankers and politicians were scared. When they joined in, investors saw that with government support the company could pass.

This time, central bankers are scared not by falling markets or economic prospects, but by inflation. Of course, if something serious happens in the financial system, they will refocus on finances, and a recession may prompt them to reconsider raising rates. But at the moment, inflation means that falling stock prices are seen only as a side effect of tighter monetary policy, not a reason to use the “Fed shackles” and save investors.

There is nothing magical about falling 20%, the usual definition of a bear market. But this happens very often: over the last 40 years, the S&P 500 has bottomed out with a 20% or so decline from a peak to a minimum of four times, in 1990, 1998, 2011 and 2018. Four times more. had much greater losses, for there was a real panic.

The overall fall of 20% was the Federal Reserve. Each time the market hit bottom, the central bank eased monetary policy, and the stock market crash may have helped the Fed take threats more seriously than it could.

I am worried that this time may be more similar to 1973-1974. As then, the country’s main concern is inflation, thanks to the war-related shock of oil prices. As then, the inflation shock began when the Fed had rates too low given the scale of the political stimulus to the economy. Just as then, pro-stocks – Nifty Fifty, now FANGS and related abbreviations – have skyrocketed in previous years.

Most importantly, in 1974 the Fed continued to raise rates even when the recession began because it was going to catch up with inflation. The result was a horrible bear market, interspersed with devastating temporary rallies, two at 10%, two at 8% and two at 7%, each repaid. It took 20 months before the minimum was reached – not coincidentally, when the Fed finally began to take seriously the reduction of rates.

So far this time has not been so bad for stocks, not least because the economy is not in recession. If inflation goes down, the Fed won’t need to raise rates as much as it has shown would be a great boon for the stocks that have suffered the most.

I still hope that the economy will be sustainable, although it will be a long time before we learn enough to make it a good bet. Simply put, after the stock more than doubled in two years, the market declined more more than 20% seems plausible.

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Email James Mackintosh at james.mackintosh@wsj.com

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