There were a lot of unfavourable comparisons on Monday between the massive sell-off in Asian markets and the Asian financial crisis of the late 1990s. There are some similarities, and some big differences.
But Goldman Sachs researchers see one comparison that’s positive for US equities — the summer 1998 slump was followed by a speedy rebound.
Here’s the crux of Goldman’s argument (emphasis ours):
S&P 500 has corrected for the first time in three years, declining by 11% from its May record high. Concern about China economic growth was the immediate catalyst for the correction. We expect the US economy will avoid contagion and continue to expand. S&P 500 will rise by 11% to reach 2100 at year-end. Such a rebound would echo the trading pattern exhibited in 1998 when US equities rallied and largely ignored the Asian financial crisis. Next week’s macro data may provide reasons for investors to have confidence in durable US growth. Own stocks with high US sales.
Here’s the chart of what happened in ’98 against what’s expected now:
It’s a little less impressive — in 1998, the S&P 500 ended up some way above above where it did at the pre-crisis peak. Goldman only expects the index to climb back to where it was in the spring this year.
Here’s their explanation:
We expect the market will recover but at a slower pace than during 1998. Unlike the current episode, the 1998 correction occurred in the midst of the Tech Bubble. Info Tech stocks returned 25% between September and December 1998, driving a 28% rally in the overall S&P 500 index. The S&P 500 P/E multiple also expanded by 33% during the last four months of 1998.
Effectively, they think stocks aren’t undervalued in the way they were during 1998, and that there’s no bubble to support them this time.
Though there’s clearly concern about Chinese growth stuttering, the analysts think that’s overblown, at least from the perspective of the US economy.
According to their researchers, a 1% point dip in Chinese growth means a drop of just 0.06% in US growth.
Despite that, combined with the general outlook, Goldman expects that the Fed will preach caution and hold of its first post-crisis interest rate hike until December.