Only 2 weeks back I wrote about markets "Melt Up" which really turned out to be a "Meltdown. It all started with employment report on 2/2. DOW dropped 666 on 2/2 and continued into next week with 1000 point swings on DOW. What may have suddenly triggered change of course for markets? There are multiple theories being hashed out. Before we get into some of those, let's learn little bit about history which seems to be repeating every 10 years. Let's look at 1998 and 2008.
Year 1998:
This is the time US was in its longest bull market and irrational exuberance was in full force with "dot.com" bubble forming. Another president (with somewhat similar personal character traits) was in white house. Experts (including Nobel Laureates behind LTCM) were making one-way bets on "convergence" in bond prices. Questionable dot.com companies were coming to markets with billion $ valuations with just some eye-balls as "customers". Generally life was good and then boom. Asian crisis, Russian ruble crisis (Russia has to be in news every time) caused LTCM bets to go bust and markets to crash. Check out news around that time
Year 1998:
This is the time US was in its longest bull market and irrational exuberance was in full force with "dot.com" bubble forming. Another president (with somewhat similar personal character traits) was in white house. Experts (including Nobel Laureates behind LTCM) were making one-way bets on "convergence" in bond prices. Questionable dot.com companies were coming to markets with billion $ valuations with just some eye-balls as "customers". Generally life was good and then boom. Asian crisis, Russian ruble crisis (Russia has to be in news every time) caused LTCM bets to go bust and markets to crash. Check out news around that time
- U.S. stocks suffer largest weekly drop - Aug. 28, 1998 - CNNMoney
- Dow plunges 512 points - Aug. 31, 1998 - CNN Money
In general, economy was still on solid footing and 1998 ended with 28% returns on S&P and overall markets went up by close to 60% from their bottom in Aug/Sept 1998 till Mar 2000.
Year 2008:
Most of us still vividly remember the dark days of Great Recession which started in Sept 2008 with bust of Lehman Brothers. Percentage equivalent of today's 1000 point swings were common in those days. All of these went on for a year before markets reached bottom in Mar 2009. This was caused again by very aggressive bets on housing prices will never go down and derivative, credit default swaps on MBS (mortgage backed securities). Some of the news during this time
Year 2018:
That brings to events of last 2 weeks. This time markets became complacent about "calmness" or lack of volatility. Despite unpredictable nature of our president and stretched market valuations, experts made one way bets against volatility. And when just a small sign of inflation in employment report triggered interest rate on 10-year treasury to jump to 2.85 (which is still very low historically), volatility returned ferociously. Change of guard at Fed (from Yellen to Powell) and additional deficit as part of budget deal in congress added fuel to "volatility". The forced un-winding of bets triggered wave of selling and caused 1000 point swings in DOW (4 out of 5 days last week). Now that markets got its long overdue correction, is it done? Don't know and for long-term investors it should not matter. Look at history of 1998 and 2008. As long as you believe in long-term economic trajectory of US and world, markets would come back. These weeks would become part of market history but won't change long-term trajectory. You can always do dollar-cost averaging to catch some of the opportunities presented by this correct. So relax and enjoy Valentine's Day with your loved ones!
/Shyam
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