The mess that is the stock market over the past few days is drawing numerous comparisons to similar drop-offs of the past, most notably the one in 1998.
In 1997-1998, a slowdown in emerging markets, particularly Asia, seemed to spur concerns over global growth. This led to one of the biggest and quickest drop-offs in the US stock market in years. Sound familiar?
According to Aneta Markowska at Societe Generale, investors should caution themselves before using the comparison.
“Concluding that this time is the same would be neither fair not accurate,” Markowska wrote. “The structure of the global economy has changed dramatically since the late 1990s and the transmission channels are not the same today.”
On the positive end, she agrees with other analysts who say what is happening in Asian markets today is not as bad as what was happening in 1997, since the countries have sounder economic fundamentals.
“A full-blown EM crisis is not in our central scenario, in part due to the still-large FX reserves in many emerging economies which will allow them to fight disorderly capital outflows,” she said.
Markowska also mentions some differences that do not bode as well.
While a relatively small portion of the US’ gross domestic product is derived from demand from developing economies, Markowska says US dependence on that demand has increased since 1998 and could affect the look of this correction.
“The emerging world accounts for a much larger share of global GDP and absorbs a larger share of global commodity production,” she said. “The US is a larger producer of energy, and its oil & gas sector is thus more vulnerable.”
To be fair, she noted that domestic demand was still the main driver of the US economy, but the growth in exposure to these markets should still have an impact.
Additionally, there are numerous reasons to believe the major bounce back that occurred in 1998 — the S&P 500 ended up gaining 28% for the year — will not happen this time, as Goldman Sachs predicted.
The first of these reasons Markowska highlights is the overreaction of the Fed in 1998 that helped inflate the already growing tech bubble and ultimately led to more problems for the US economy:
This was the largest financial shock in over a decade and the Fed intervened via three rate cuts delivered between September and November. In hindsight, these cuts proved not only unnecessary, but also costly. The broader economy showed no reaction to the shock. On the contrary, GDP growth accelerated from 4% in the first half of 1998 to 5.3% in Q3 and 6.7% in Q4 of that year. The Fed subsequently had to reverse the three rate hikes and to tighten aggressively over the next 18 months. Despite this, it was still unable to prevent the 60% rally in equities that ultimately followed.
Overall, Markowska says the attitude of the economy is different from the attitude during that decade. “Perhaps most importantly, the fundamental backdrop in the developed world is dramatically different, with little appetite for debt-fuelled growth, weak productivity growth and limited scope for further monetary easing,” she said.
While the current situation may bear some resemblances to 1998, the differences Markowska points out are significant and caution against jumping to conclusions.
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