Friday, August 21, 2015

Quick note: a comparison with 1994

American stocks have plunged during the past few days, and that's led some market commentators to draw comparisons between today's market and the volatile markets of 1987 and 2008. I think 1994 is a better comparison.

In 1994 the S&P 500's net change was minimal, but many financial markets experienced significant volatility. Oil, emerging markets, and junk bonds all fell, like they've fallen this year.

The S&P 500

In the six months from October 1993 to March 1994, the S&P 500 traded in a narrow range before falling 7% in six trading sessions. It subsequently rebounded and ended calendar-year 1994 down 1.65%, although the total return was positive thanks to dividends.

In the past six months, the S&P 500 has traded in a narrow range before falling 6% in four trading sessions so far.

Many market pundits have commented on the stock market's weak breadth this year. The same dynamic existed in 1994. In the months before the market broke down, the NYSE advance-decline line was noticeably weak.

Corporate debt

Junk bonds and investment-grade bonds both fell 3% in 1994. They're down by comparable amounts so far in 2015.

Crude oil

From October 1993 to March 1994, crude oil fell 27%, staged a dead-cat bounce, and then fell back to its lows.

During the past twelve months, crude oil has followed the same pattern of a large decline, a dead-cat bounce, and a second decline, but the percentage moves have been twice as large and it's taken twice as long to play out.

Emerging markets

In 1994, emerging-markets stocks and bonds underperformed their first-world counterparts by double digits. So far in 2015, emerging markets have significantly underperformed developed markets.

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