The Warsh Era
& the 60% Calculus
Why a market reset is years overdue — and why the Federal Reserve's next chapter may finally be the one that delivers it.
On May 15, 2026, Jerome Powell's term as Federal Reserve Chair expires. His successor, by all accounts, will be Kevin Warsh — a former Fed governor who has spent the last several years arguing that the central bank is "wounded by self-inflicted mistakes" and in need of a strategic reset.
The market hears the words. It does not yet appear to have priced the consequences.
What happens when a Fed Chair takes office believing the institution itself is the problem — and that the equity market's seventeen-year diet of accommodation has been the chief enabler? That is the question every retiree, every pre-retiree, and every concentrated-stock employee in America should be asking right now.
A Fed Chair who believes the Fed itself needs reform.
In April 2025, speaking at the Group of Thirty's Spring Lecture, Kevin Warsh delivered what is now widely regarded as his shadow inaugural address. The framing was uncompromising: the Federal Reserve, in his view, has drifted into fiscal and political territory it was never designed to occupy, and its credibility has suffered for it.
Fed Chair Nominee
The shortest version of his thesis
The Fed has two tools — interest rates and the balance sheet. For the better part of two decades, it has used both with a heavy bias toward asset price support. Warsh's prescription is to use both with a heavy bias toward price stability, even if asset prices, employment, or growth bear the short-term cost.
This is not a tweak. It is a doctrinal pivot. And it would arrive at a moment when the S&P 500 has more than doubled off its October 2022 low, the Fed's balance sheet still sits at $6.8 trillion, and the cyclically adjusted price-to-earnings ratio is the second-highest in 150 years of recorded history.
Lower inflation tolerance
Warsh has signaled a stricter 2% PCE target without the public hand-wringing about "transitory" deviations. Markets that have grown accustomed to the Fed talking down inflation pressures may now hear them talked up.
Aggressive balance sheet reduction
From $6.8 trillion downward — and faster than Powell's gradual taper. Reducing the Fed's footprint mechanically pressures Treasury yields higher, which mechanically pressures equity multiples lower.
The end of the Fed put
The implicit promise that the central bank would intervene whenever stocks fell more than 10–15% has shaped every portfolio constructed since 2009. A Warsh Fed is, by his own description, prepared to tolerate volatility it once would have suppressed.
"The Fed has an interest rate tool and a balance sheet tool. We need a regime change in how monetary policy is conducted."
— Kevin Warsh, paraphrased from public remarks, 202560%
The S&P 500's drawdown the last two times a CAPE ratio above 35 met a tightening cycle.
Where today's valuations sit on the long historical record.
The Shiller cyclically adjusted price-to-earnings ratio — CAPE — uses ten years of inflation-adjusted earnings to filter out the noise of any single business cycle. As of this week, the U.S. CAPE reads roughly 41.7, against a long-term median of 16.0. The market has only been more expensive once before in the 150-year record, and what followed each prior approach to today's altitude is the central data point of this essay.
CAPE-35-Plus and What Followed
Three episodes. Three drawdowns. One pattern.
| Episode | Peak CAPE | Subsequent Drawdown | Years to Recover |
|---|---|---|---|
| Black Tuesday Era September 1929 | 32.6 | −83% | ~25 |
| Dot-Com Peak November 1999 | 44.2 | −49% (S&P), −78% (Nasdaq) | ~7 |
| Pre-GFC October 2007 | 27.5 | −57% | ~5 |
| The Present May 2026 | 41.7 | — | — |
Two things deserve to be said clearly. First: the CAPE is famously poor at timing. Markets stayed expensive throughout 1997, 1998, and most of 1999 before the dot-com peak gave way. An elevated CAPE is not a sell signal in the next-week sense.
Second, and more important: the CAPE is famously good at predicting ten-year forward returns. Crestmont and Shiller research both show that buying U.S. equities at a CAPE above 35 has historically produced annualized returns of roughly zero to three percent over the following decade. Below 15, the same study shows double-digit annualized returns.
That is the 60% calculus. Not "the market will fall 60% next Tuesday." The calculus is this: history offers no example of a CAPE this high resolving into anything other than a multi-year reset. The reset has historically been swift (1929, 2000, 2007), or it has been slow and grinding (Japan after 1989). It has never simply been forgiven.
How a generation of investors learned to stop worrying and trust the rescue.
It is impossible to understand the urgency of a Warsh-era reset without first understanding what the Greenspan-Bernanke-Yellen-Powell continuum trained American investors to expect.
Long-Term Capital Management
The Fed orchestrates a private-sector rescue of a single hedge fund deemed too interconnected to fail. The market lesson: the central bank will act when leveraged players are at risk.
Quantitative Easing — round one
The Fed's balance sheet expands from under $900 billion to over $2 trillion. The Fed put is no longer implicit. It is operational, programmatic, and announced in advance.
The Powell Pivot
After a December correction, the Fed abandons its hiking path. Equities rally. The market learns, again, that pain in stocks is sufficient to move policy.
Pandemic-era expansion
The balance sheet doubles again, to nearly $9 trillion at peak. Asset prices rebound to record highs within months of the fastest economic contraction in modern history.
The slow taper
Powell shrinks the balance sheet from $9 trillion to roughly $6.8 trillion — careful, gradual, and with constant public communication. The taper is real. It is also, by historical standards, modest.
The Warsh handover
A nominee on record describing the Fed's recent posture as offering "false precision," advocating regime change, and signaling a willingness to tolerate slower growth and softer asset prices in the service of a 2% target.
"Powell's Fed managed transparency. Warsh's Fed, by his own framing, will manage discipline. The two postures are not interchangeable — and neither are the portfolio outcomes they tend to produce."
— BFS Editorial DeskThree forces, one moment.
Risk in markets is rarely the product of any one variable. It is the product of variables aligning. What is unusual about the present moment is the simultaneous arrival of three independent signals that have, individually, preceded every major reset of the modern era.
Valuation extremity
Shiller CAPE at the second-highest reading in 150 years, exceeded only by November 1999. Forward 10-year return expectations historically: 0–3% annualized.
Bull market age
The current bull market is now older than the long-term average interval between bear markets (3.5 years, per Ned Davis Research). Time itself is no longer on the side of the trend.
Policy regime change
The arrival of a Fed Chair on record arguing for tighter discipline, smaller balance sheet, and an end to the implicit asset-price backstop that has shaped portfolios since 2009.
None of these forces, in isolation, guarantees a reset. Markets have stayed expensive for years. Bull markets have, on occasion, run longer than the average. Hawkish Fed Chairs have, on occasion, been talked into accommodation. But the historical record on all three forces converging at once is unambiguous: the resolution has always been a meaningful, multi-year repricing of equity claims.
The reset has been, by any reasonable historical measure, years overdue. The question that has hovered over markets since 2022 has never been whether — it has been what catalyst. The Warsh handover may, in retrospect, prove to be that catalyst.
What this means for the retiree, the pre-retiree, and the concentrated-stock employee.
Editorial frameworks are interesting. Portfolio decisions are consequential. If the analysis above is even half-right, three categories of investor face very different exposures than they did at the start of this bull market.
Sequence-of-returns risk has rarely been more acute.
A 50% drawdown taken at age 65, paired with ongoing distributions, is a very different event than a 50% drawdown taken at age 45 with thirty years to recover. The math of withdrawal during a reset is not the same as the math of withdrawal during accumulation. Defensive positioning does not mean abandoning equities — it means stress-testing whether the portfolio can survive the historical worst case.
The next five years are the years that matter most.
The five years immediately preceding retirement disproportionately determine retirement outcomes. A pre-retiree entering the Warsh era with the same allocation they held five years ago is not running the same portfolio they think they are — the equity weighting has drifted higher with the bull market, and the risk concentration has drifted with it.
Single-stock risk meets macro risk.
For employees of Southern Company, Georgia Power, and other large enterprises whose retirement wealth sits in employer stock, a market reset compounds an already-meaningful concentration problem. Diversification before the reset is a different conversation than diversification during it.
Position your portfolio for the regime change that may already be underway.
Bailey Financial Services is a fee-only fiduciary RIA. We don't sell products, we don't earn commissions, and we don't manage portfolios as if the next ten years will look like the last ten. If this analysis raises questions about your own positioning, we'd welcome the conversation.
Editorial note. This page reflects the views of Bailey Financial Services as of May 8, 2026, and is provided for educational purposes only. It is not a forecast, not a recommendation to buy or sell any security, and not personalized investment advice. Past performance, including the historical drawdowns referenced above, does not predict future results. Markets that have been expensive have, on occasion, become more expensive before resolving. Investment decisions should be made in the context of your own financial plan, time horizon, and risk tolerance, ideally in consultation with a fiduciary advisor.