Yesterday was a wild ride. The market dropped steeply at the open, plunged even more at midday, and then came back strong, leaving us down just a little.
I was getting on a plane as it was dropping the most, and I have to admit it was an anxious flight. The market was the first thing I checked when we landed, and I was relieved to see the recovery.
What to make of the bumpy ride? In the short term, it looks like investors decided the market was a pretty good buy yesterday afternoon. Longer term, it’s hard to say. What we need is some context.
A Look Back To Crises Past
To provide some, I’ve been comparing the current situation with both 1998 and 2011.
- In 1998, if you remember, the Asian and emerging markets saw a currency and debt crisis that threatened to bring down the global financial system.
- In 2011, the eurozone was in turmoil about a Greek bankruptcy and the potential collapse of the European and worldwide banking systems.
- Today, we are facing debt and market crises in China and the emerging markets due to weak banking and financial systems, which threaten to bring down the world financial system.
Sound familiar? Given the many similarities between now and then, what can the 1998 and 2011 crises tell us about today?
Let’s start by looking at the behavior of the S&P 500 in 1998.
Source: Google Finance
As the chart shows, we saw a decline, from peak to trough, of about 18 percent, then a bounce back up, and then another decline, but the market subsequently recovered and went on to new highs for the year. The decline started on July 17, and the market hit a new high on November 27, just over four months later.
Now let’s look at the S&P 500 in 2011. (Note that this chart extends into 2012.)