Wall Street Sell-Offs: What's Different This Time Around

Of all the differences that separate the current market sell-off from the sell-offs of the last couple of years, one stands out: the absence of a "Fed put," an accommodative monetary policy to support the market this time around.

Market sell-offs are part of the Wall Street game.

Most of them are short and shallow, in a bullish trend. So, they come and go, quickly creating buying opportunities for long-term investors with a shopping list for companies with solid economic fundamentals.

But there are exceptions to this rule.

Some sell-offs are long and deep, in a bearish trend. They stick around for a while, inflicting heavy losses for investors in companies with weak fundamentals. These companies may never recover to the levels they were trading at before the sell-off began. As a result, market sentiment turns from bullish to bearish as market experts try to figure out what's different this time around.

"Almost like clockwork, when uncertainty abounds, the market begins to fall, and bull markets become bear markets, narratives begin to surface that this time is different," Jim Schultz of Tastytrade told International Business Times. "Whether it's the Great Depression of 1929, Black Friday from 1987 or the COVID crash of 2020, the supporting points surrounding every major market drop of the last century certainly point towards a doom and gloom, never seen before."

What makes the difference between the two kinds of sell-offs?

The macroeconomic context, the conditions and the circumstances in which the Wall Street game takes place.

A stable macroeconomic context of low inflation, steady economic growth and accommodative monetary policy supports bull markets where sell-offs are short and shallow.

An unstable macroeconomic environment of declining economic growth, rising inflation and monetary tightening is supportive of bear markets where sell-offs can be prolonged.

That's what seems to be the case in the current sell-off.

"Today's market sell-off is happening amidst not one or two — but multiple — significant market headwinds, making it stand out as unique from any sell-offs in recent memory," Bryan Shipley, Co-CEO and chief investment officer at Arnerich Massena, told International Business Times. "The U.S. Federal Reserve, in its attempts to fight inflation, is planning to raise interest rates for the foreseeable future, reducing consumer and business demand and dampening stock prices. The Fed will be reluctant to provide stimulus in response to any volatility, creating further caution among investors."

Shipley points to several supply-side shocks that aggravate the macroeconomic environment due to the pandemic and the Russia-Ukraine war, which have created an energy crisis.

"In this environment, investors will need to be thoughtful to find opportunities to carry them through this cycle," he said.

"The current market dynamic is unlike anything we have seen before," Heeten Doshi of Doshi Capital Management told International Business Times. "The market is contending with 40-year-high inflation due to supply shocks, a Fed raising rates trying to dampen demand to slow prices, and a slowing economy from stimulus withdrawal, all at once. At the beginning of the year, the market was concerned with an aggressively hawkish Fed. Now, the market is adjusting to a slowing consumer and economy in the face of a hawkish Fed."

How does that differ from previous monetary tightening cycles?

"In the past, when the Fed tightened and tried to reduce its balance sheet, it always caved to the market, known as the 'Fed put,' " Doshi said. "What's different this time is that inflation is the Fed's No. 1 goal, and no matter how much the market corrects, the Fed is insistent on raising rates to control inflation."

Is there a light at the end of the tunnel?

"The good news is that oversold markets tend to bounce, even in a bear market," Doshi said. "Even in the 2008 recession, the S&P managed to have several 5% to 15% bounces on the way down. Many indicators across the board were signaling extreme bearishness and oversold conditions that are ripe for a rally. Whether it is a bear market rally or a continuation of the bull market is yet to be seen."

What's the best strategy for long-term investors?

"Even given the major headwinds that each one of these market drops were facing, the best bet any investor with a long enough time horizon could have made would have been to hold the line, add to their investments and buy the dip," Schultz said. "In 2022, with extreme inflation, rising interest rates, and war abroad, it seems that this time really is different - especially when you factor in the novelty and newness of cryptocurrencies and NFTs. But if history is any guide, while the characters in the story might be different, and the plotline itself might have a few new wrinkles this time around, the ending will likely be exactly the same: higher … much, much higher."