The Investment Scientist

Will We Get Even Deeper Discounts on Stocks?

Posted on: September 5, 2022

Since the beginning of this year, the stock market has experienced its worst six months in the last 50 years. At one point, the Nasdaq was down 30%, and the Dow and the S&P 500 were in bear market territory. From its lowest point, the market has recovered a bit, but after Chairman Powell’s Jackson Hole speech, the market seems to have resumed its slide. So the question is, will the market give us even deeper discounts on stocks?

Before we go into that, let me sum up my impression of Chairman Powell’s Jackson Hole speech. He has found his inner Paul Volcker! He has turned from a super dove to a super hawk when it comes to inflation.

In case you don’t know yet, Paul Volcker was the Fed Chairman appointed by President Carter and reappointed by President Reagan who finally reined in inflation during the late 70s and early 80s. . He imposed punishing interest rate hikes that led to two recessions and he did not give up until inflation fell from 13% to around 3%.

I must say I like today’s Chairman Powell more than the one at the end of last year. That Chairman Powell tried to convince the country that inflation is “transitory”, and this complacency might have caused the problem to become worse. Because when people lose faith in the Fed’s judgment and will and ability to tame inflation, inflation will get worse. Here expectation begets reality. 

I am glad that Chairman Powell has taken a 180-degree turn with his Jackson Hole speech. He may need to do this a couple of times to shed his reputation as a super dove-ish Fed Chairman. What does that mean for stocks if he carries through?

It means the Fed will no longer print money just to support the market. For a long time now, stock investors have felt like they have a Fed Put – when things get tough, the Fed will come to the rescue – this is like owning a put option. If the Fed means business, this Fed Put is gone for good. The market will be more aligned with economic reality, and investors will no longer need to pay inflated prices just to own stocks. Put it in another way, we are likely to see deeper discounts in the market. This is great news for wealth accumulators since the same amount of money can buy more assets. 

For folks in retirement already and who are done with accumulation, the situation is more challenging. I will write about that in future articles. On balance though, inflation is a far more insidious wealth destroyer, far more damaging to retirees’ wellbeing than bear markets. I am glad the Fed is beginning to show resolve to fight it. 

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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