While many are preoccupied with the risk of a stock market crash — a larger than 10% decline in a single session — it may be time, instead, to consider the implications of a long-term bear market, the likes of which we have not seen in decades. Barring a series of trade deals that satisfies the Trump Administration, the short-term pain will continue on Wall Street and likely make its way down Main Street, as well. It's important to remember that trade is only one piece of this Administration's plans to re-make the post-World War II order, including not only trade relations but also geo-political alliances and military spheres of influence. This would not be the first time in market history that stocks remain stuck in a trading range for a protracted period. From 1966 until 1982, the Dow traded roughly between 700 and 1,000 as the Vietnam War escalated; the U.S. abandoned the gold standard; inflation took off; President Nixon implemented unsuccessful wage and price controls; the Arab oil embargo rocked world energy and financial markets, as did the Iranian Revolution in 1979, among other issues that created long-term economic and market volatility. Is it possible that the U.S. and the rest of the world are entering a similar period of uncertainty, a series of alternating shocks and responses and longer-term market stagnation here at home? Market conditioned to rally We've been conditioned, since 1987, to expect market panics and crashes to be relatively short-lived and reversed by policy actions enacted by both the federal government and the Federal Reserve. It's true that we've had multi-year bear markets in that period, and a series of recessions, the worst of which was the Great Financial Crisis (GFC) and subsequent economic meltdown. They were, for the most part, short to intermediate term in duration — but that could be about to change. What we haven't had is a prolonged period of economic stagnation and a market that moves sideways for periods exceeding 10 years. While this is not a base case, nor is another single-day, 22% slump in the market, as we saw in the 1987 crash, it would behoove investors to review all the possibilities facing the economy and markets, given the multiple uncertainties around the Trump Administration's planned re-set of global alliances. The Dow Jones Industrial Average first touched 1,000 in 1966 and would not meaningfully breach that level until late 1982 as the great bull market of the 1980s gathered steam. Stagnation replay Could we see a replay of such a period, when bouts of both short-term volatility and long-term stagnation come into play amid all of the vagaries of current policy ambitions? It's possible under the following circumstances: What if there is a serious decoupling of U.S. trade alliances? What if the U.S. realigns itself with countries that have historically been adversaries rather than traditional allies? And what if the U.S. turns a blind eye to Russia fully annexing Ukraine and China fully annexing Taiwan? What does the world look like then? And, of course, the U.S. itself may embark, at least theoretically, on expansionist policies given this administration's suggested goals for Greenland, Panama and even Canada. Gilded Age panic Despite President Trump's admiration for America's growth phase between 1870 and 1913, that period was also filled with a variety of wars, market panics, bank failures and rapidly shifting global alliances. Maybe trying to predict crashes and pick bottoms in the stock market is the wrong way to think about the current environment, especially if it persists for more than just a few years. Remember, when the market crashed in 1929, the Dow would not recapture its Roaring '20s high until 1954. That's not a scenario I think is comparable to where we find ourselves right now. But I am growing increasingly concerned that a stagflationary environment could severely depress stock market returns for a much longer period than currently envisioned. If policy currently represents out-of-the-box thinking, maybe investing plans require the same. There are lots of places to invest one's money. The U.S. stock market has outperformed the rest of the world for decades. That wasn't always true in prior periods and it's possible it may not be true in the decades ahead. Investors might want to be less parochial just as political policy becomes increasingly so. In the immortal words of Buffalo Springfield: There's something happening here. But what it is ain't exactly clear.
