The Asian Contagion – 1998 Rhyme Of Market Correction by Stephen Aust, MarketCycle Wealth Management
History does not repeat, but to quote Mark Twain: “History sometimes rhymes.” In our opinion, what we recently went through was a rhyme of 1998. We dodged a bullet; it could have been worse than it was.
1998 revolved around the “Asian Contagion” which involved the falling of emerging market currencies, falling interest rates, plummeting oil prices, increased interest in U.S. Treasury-Bonds, falling global stock markets (minus a U.S. recession), increased investor panic and subsequent strong recovery:
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- In early 1998, Asian emerging market currencies started to tumble (China is an Asian emerging market).
- Emerging market countries started to raise their interest rates in an ill-fated attempt to prop up their currencies.
- The rise in interest rates caused the emerging market stock markets to fall.
- Fear caused a general rush to re-lower interest rates in Asian countries.
- Oil prices went into free fall which sparked worries centered around the dreaded word, “deflation.”
- Global stocks in commodity producing developed markets started to fall further.
- The U.S. stock market had gone sideways for an extended period (similar to 2015) but the global economic downturn eventually caused the fears to spread to United States’ stocks. Global stock markets were now positively correlated and moved in unison.
- Oil prices continued to fall to the lowest level in decades (oil recently fell into the mid $20s, as MarketCycle predicted).
- As global investor money fled ALL stock markets, the money flowed into long-dated U.S. Treasury-Bonds.
- U.S. Treasury-Bonds temporarily became the strongest market in the world.
- The stock market eventually reached severely oversold levels, then quickly and strongly climbed to new highs off of a “??” shaped bottom (meaning a bottom and then a retest of that initial bottom one month later… just like in mid-February of 2016).
- As stocks retested their bottom, Treasury-Bonds began to fall off of a “?” top and continued to fall sharply for the next year, becoming the weakest asset market in the world.
- And similar to the recent correction, the U.S. economy did not move into a recession even though manufacturing and corporate earnings had weakened.
Since the year that I was born, and that has been awhile, there have only been three previous large market corrections that weren’t accompanied with a concurrent recession, (the crash of) 1987 & 1998 & 2011, and each one eventually led to new highs. MarketCycle’s risk indicators, back-tested and in real time, would have caught all three.
So, if MarketCycle is correct, the current period is a rhyme of the deflationary “Asian Contagion” market correction of 1998 and the stock market should, once again, eventually rush on up to new highs… just as it did in 1999. Frankly, it looks like we dodged a bullet; risk was incredibly high and this could have been worse than it was.
In the intermediate-term, in our opinion, China and oil and industrial metals will now stabilize and this will assist in the recovery of developed market stocks. Emerging markets should continue to lag in relative strength. When the next recession finally does hit, we are likely to see even lower commodity prices.
Here is a chart showing the 1998/1999 bear market with its volatile “??” bottoming process and subsequent strong recovery.
Why should we concern ourselves with the idea of avoiding bear markets?
$10 invested into U.S. stock market in 1928 and held until the year 2000 using “Buy & Hold” would have accumulated to a total of $17,020.
$10 invested into the U.S. stock market in 1928 and held until the year 2000, while avoiding the 30 worst performance months during that same time period would have grown to a staggering $1,864,400! This time period does not include avoidance of the depressionary and deflationary years of 2000-2009, with its two back-to-back 50%+ losses followed by two 100%+ gains, but including 2000 to today would have brought this gain up to a number that readers simply would not believe. (HINT: double the above profit number… twice!) This is why all investors (or their advisors) must monitor for any upcoming bear markets and they must avoid them.