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Sunday, October 30, 2011

The 1998 Time Warp

One of my earliest memories of following the financial markets was the meltdown in 1998 caused by the Russian Debt Default and the subsequent collapse of Long Term Capital Management.  It was the most severe and sustained collapse in equity prices that I'd ever seen, which wasn't that impressive since I was only 12, but it still left a mark on me.

For that reason, I am struck by how similar the bottoming process in the stock market looks now to what it looked like then. (CLICK ON IMAGE FOR LARGER PICTURE)

The scale of the rout this year is also very comparable at about -19% from peak to trough and the rally is happening at about exactly the same time and at very nearly the same trajectory.

However, while history does tend to rhyme, it doesn't fully repeat and the next verse can be very different from the first.  There are considerably more risks now than there were, at least immediately, in 1998.  Also, as I will address in my next post, the European bailout package just does not seem to be of the magnitude necessary to completely dispel the considerable worries of the financial markets.  However, the equity markets were so terribly undervalued at their most recent bottom that the present rally is fully warranted.

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