We didn't plan this; but when I read INO.com contributor Lior Alkalay’s post entitled "Asian Financial Crisis: Now and Then," I immediately wanted to chime in with my perspective.
Lior nicely covered the Asian Contagion from a forex point of view. I'll focus mostly on the economy and the stock market.
About a month ago, in the midst of the most extreme stock market volatility, Ken Fisher (founder of Fisher Investments) gave a highly memorable interview to CNBC, in which Fisher said today's markets are "in so many ways reminiscent of the 1997 correction."
Fisher proceeded to elaborate on comparisons between 1997 and today, qualifying his remarks by citing the same adage Lior used about history never repeating, but often rhyming. Here, I quote Fisher's litany of similarities today's correction shares with 1997's:
"Both were emerging-market currency-oriented, both occurred in a period of very stable interest rates (short and long-term), with falling commodity prices, in a period when tech and healthcare had been leading the markets, energy had been lagging, both following long periods of not having a correction, and almost the identical period since a global bear market and recession that was… heavily associated with housing-related things. People forget that the 1990s process was the S&L crisis when an almost identical number of financial institutions failed as in 2008-09, and on a money-value basis (inflation adjusted) was actually bigger."
Okay, so an almost eerie amount of commonalities are in place. In fact, I'll add a strong dollar as one of the most important ones. Further, I'll underline Fisher's observation that both episodes included falling commodity prices, which certainly puts pressure on Russia, as Lior so eloquently detailed.
What does it all mean? Fisher continues, "The likelihood is that there's some more pain ahead, but that it's over just about as fast as it came and trying to time that is a fool's game."
Fisher later added – importantly – that the next upswing will likely occur "while people are still fretting what's going on with China." This makes sense and is compatible with the proven fact that "markets climb a wall of worry."
Finally, Fisher said the US led the way out of the 1997 correction, with particular outperformance by bigger and higher quality stocks.
I admit I don't remember the Asian Contagion of 1997. I entered the investment business in 2002, so – like many others in the investment business today – I really wasn't paying much attention 18 years ago. I've heard much about 1997's Asian Contagion, of course, and 1998's failure of mega-hedge-fund Long-Term Capital Management (LTCM); but I didn't live it. But…
Fisher's firm – which regularly publishes remarkably good research – expounded upon its founders' comments. In large part, Fisher's staff is in agreement with Lior's astute analysis that today's circumstances are actually quite different than those 18 years ago (despite a number of readily observable commonalities). For Fisher's firm, though (and for me), the takeaway remains the same – and is just as prescient. I'll leave it to Fisher's staff to sum it up, as follows (emphasis added):
"The false fear in 1997 was Asian nations would infect the world, causing a recession. The parallels between then and now are many. They aren't perfect. Again, no two time periods are exactly alike. But in many ways, the present correction is based on less actual evidence of weakness than then. In 1997 and 1998, Asia experienced a regional recession. Currency pegs broke and devaluations were in the double digits. Today, we have China's tiny -3% devaluation and economic data are mostly in line with recent trends—more modest slowdown, no hard landing.
"Whether or not the recent correction reached its low on August 25, we can't say. Timing and pinpointing sudden shifts in sentiment is impossible. But in our view, the pressure on stocks since late August has all the classic signs of being a 1997-like correction, not something worse."
I feel compelled to point out that the 2 years following 1997's correction were phenomenally good ones for US stocks – although the run-up proved to be a bubble followed by a devastating crash. The point is this: the false fear of 1997 did not lead to a global recession. Nor does evidence point to a global recession beginning now. For one case-in-point, consider that in the US, the Conference Board's Leading Economic Index (LEI) was slightly positive in August and has been positive in 17 of the last 19 reports! In the LEI's 55-year history, no US recession has ever begun while LEI was high and rising. The LEI, by the way, includes things like new factory orders, manufacturers' new materials & capital goods orders, building permits, the stock market, and the yield curve (which itself is a remarkably prescient recession indicator). Foreign LEIs are in similarly good shape today.
Economic growth is still positive around the world, although we'd all prefer stronger growth. Earnings may be flat to slightly down, but such events do occur within bull markets. Certainly, the energy sector is in a major bear market; but the other sectors, in my view, are likely enduring only a mere correction – the likes of which markets normally recover very swiftly. Unless something totally unforeseen happens (something no one sees today). How's that for a disclaimer?
Best,
Adam Feik
INO.com Contributor - Energies
Disclosure: At the time of post publication, this contributor owned Enterprise Product Partners (EDP), but did not own any other stock mentioned. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
