The U.S. stock market has been crashing all year long. In fact, year-to-date, the S&P 500 is down 23.3% through its first 184 trading days of the year. That makes 2022 the fourth-worst year in the stock market’s history.
Against that backdrop, we’re all hoping things get better. Well… guess what? They will – and soon.
But first, the stock market has to do what it always does before it bottoms: a “Grand Finale” crash.
That crash is upon us. It will be very fast and very painful. And a lot of folks will run for cover during this bear market’s final leg. But astute investors will start looking for golden buying opportunities in the wreckage.
Indeed, history shows that what comes after this “Grand Finale” stock market crash is a 50%-plus surge in just 12 months. And a certain group of stocks will rocket much, much higher.
Here’s a deeper look.
The “Grand Finale” Stock Market Crash
For the stock market to truly bottom, all the sellers need to be exhausted. For all the sellers to be exhausted, you need capitulation. Everyone needs to throw in the towel, with the consensus being that the end of the world is near.
Capitulation only happens on the heels of selloffs so fast and furious that investors are left feeling demoralized. Even the bulls give up all hope of a recovery rally.
That’s why every time the stock market crashes, it usually ends with a “bang.” Our analysis suggests this bang can be quantified by a sharp, ~20% accelerated selloff over the course of 15 trading days or less.
Once this happens, stocks usually bottom. But they never bottom until this happens.
In March 2020, stocks didn’t bottom until after they crashed 28% in just 15 days. In December 2018, stocks didn’t bottom until after they crashed 16% in just 15 days. They didn’t bottom in March 2009 until they crashed 18% in 15 days; and they didn’t bottom in July 2002 until they crashed 19% in 15 days.
On average, crashes usually don’t end until after the stock market plummets about 20% in 15 days. That’s the “Grand Finale” selloff.
We haven’t had that Grand Finale yet in 2022. Currently, stocks are about 11% off their trailing 15-day highs. At worst this year (in June), stocks were just 12% off their 15-day highs.
In other words, we haven’t yet had the fast-and-furious capitulation selloff that typically marks a bear market’s end.
But we’re about to get it over the next few weeks…
Something Is Going to Break
The Fed is currently embarking upon the fastest and most aggressive rate-hiking trajectory ever. Last week, it made it abundantly clear that – despite falling inflation and slowing economic data – it will stay on this unprecedentedly aggressive path for the foreseeable future.
That’s problematic because every time the Fed hikes rates like this, something breaks.
Look at the chart below.
After the 1987-89 rate-hike cycle, the savings and loan industry broke. After the 1994-95 rate-hike cycle, the U.S. economy nearly broke. In 2000, the internet industry broke. In 2007-08, it was the housing market. And then after the 2015-18 rate-hike cycle, the stock market broke.
Every time the Fed hikes rates like this, something breaks. Today, the Fed is hiking rates further and faster than ever before. Something will break. The only questions are: what and when?
We think the real and financial asset bubbles will break – and within the next few weeks.
The bond market is already crumbling. Bonds are about as beaten-up today as they’ve ever been in the past 50 years. Stocks are suffering, too, and the selling pressure just won’t let up. Meanwhile, commodity prices are collapsing, led by a huge plunge in oil. Further, gold, silver, and cryptos are getting crushed. And home prices are collapsing because mortgage rates and prices have simultaneously hit decade-highs, killing affordability.
Indeed, the prices of real and financial assets are collapsing. We think this collapse accelerates over the next few weeks, leading to some of these markets “breaking.”
Bonds will probably drop to a level where yields become almost unmanageable. Stocks will probably drop another 10% to levels where real panic sets in on Wall Street. Oil will probably roll over to a point where the Saudis start to panic. And home prices will likely drop so quickly that it spooks homeowners everywhere and brings the market to a temporary standstill.
It will feel like the end of the world is near.
And that’s exactly when the Fed will put on its red cape and rescue the economy – and the stock market.
The Big Rally Ahead
Here’s the funny thing about the Fed. Depending on what the market needs, it’s both a killer and a savior.
That is, its rate-hike cycles tend to break things. But once things fall apart, the Fed enters a rate-cut cycle and saves the day.
It happens like clockwork.
In 1989, after the S&L industry broke, the Fed swooped in with a series of rate cuts that lasted three years and boosted the stock market to 50%-plus returns.
After the U.S. economy crumbled in 1995, the Fed swooped in with a series of rate cuts that kickstarted a 200%-plus multi-year melt-up in stocks.
When the internet industry broke in 2000-2001, the Fed cut rates and powered a ~100% rise in stocks over the next few years. After the housing market tanked in 2008, the Fed cut rates and started a 10-year bull market of ~300% gains. After the stock market broke in 2018, the Fed swooped in with rate cuts yet again, sparking a 30% melt-up in stocks over the next year. And after the economy spiraled out in 2020, the Fed cut rates to spark yet another huge year for stocks.
Have you heard the saying “don’t fight the Fed”?
Well, this is what it means. The Fed breaks things with rate hikes and fixes them with rate cuts. Stocks struggle when the rate hikes break things. And they recover when the rate cuts fix those things.
Right now, rate hikes are breaking things. The major damages are due in the next few weeks. But once those things are broken, the Fed will pivot to rate cuts. And stocks will recover in a significant fashion.
We’re very close to that recovery. And that means we’re really close to a 50%-plus rally in stocks.
The Final Word on the 2022 Stock Market Crash
Stocks don’t go up or down forever.
This bear market has overstayed its welcome. The selloff is in its final innings – though they will likely be the ugliest. A lot of data suggests we could crash another 10%-plus over the next few weeks before we find a bottom. We think we’re about to enter the nastiest part of the 2022 crash – the “Grand Finale.”
But the bottom is close.
And when we hit it, it’ll be up, up, and away for stocks for a very long time. Like the bottoms in March 2009, December 2018, and March 2020, this will be one you don’t want to miss.
The biggest stock market returns of this century happened in the 12 months after bear-market bottoms. If we really are just weeks away from this market’s bottom, then your chance to “strike it rich” is just weeks away.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.