In late September, when the market was retesting the August lows, I made the comment that the situation, timing, price patterns, investor sentiment and smell of the market felt a lot like 1998. Of course, the fact that I have first hand knowledge of market conditions in 1998 puts me in a very small group of money managers who have been doing this for too long.
Honestly, I hate to even offer up this guidance because someone will hold me to it and say, “You said, you said!” If you’re willing to give me a little slack and just digest this information as background noise for a potential set up in market activity, then I will continue. OK?
1998 was one of the toughest years of my career and that’s why I remember it. However, events in that year did an excellent job of washing out the naysayers and gave more aggressive investors an opportunity to buy a very quick discount in the markets ahead of one of the greatest years in stock market history (1999). Now, it would be reckless if I didn’t also mention that 1999 was the exhaustive end to the secular bull market, marking levels not to be seen again for another 13 years! The buying frenzy started in early October of 1998 and remained firmly in place until December of 1999 taking the Nasdaq up over 100% in just 12 months. Now back to 1998 and why it seems possible that we’re repeating the past today.
In 1998, investors were very keen to what was going on in Asia and recognized new weakness in one of the fastest growing economies. This from CNN in August of 1998 as gurus began to ask whether this was just a correction or the beginning of the widely anticipated bear market.
"I think we are in a correction that was way overdue," said Charles Pradilla, Cowen & Co. chief investment strategist. "There has been tremendous complacency by strategists about the Asia problem and even up until last week everyone was raising their targets. The Asia problem is real." CNN, August 4th, 1998
In August of this year, our markets buckled under the catalyst that China was slowing down.
Also at that time the Federal Reserve, under Greenspan, was talking about raising interest rates but ultimately didn’t do so until August of 1999 – one year later. They felt like they couldn’t with heavy pressure from the IMF and China. Sound familiar?
A year earlier, in 1997, the US dollar began to rise for the first time in the 90’s decade. And by 1998 the uptrend in the US dollar was firmly in place. Today, the US dollar uptrend has stalled a bit but the longer term picture is still a rising US dollar. This trend began almost exactly one year ago in July of 2014.
In 1998, value investors were the most hated of all. Along with small cap investment styles. It was all about large cap growth. Warren Buffett was a dog making the cover of Barron’s by the end of the year “What Happened Warren?”. Berkshire Hathaway lost – 9.65% from the July highs through the end of that year while the S&P 500 gained another 6.6%.
On October 19th, 2015, CNN Money ran this article.
“Warrant Buffett’s Top Stocks are Dogs This Year”
Let’s see what else?
The price pattern and the very dates of the 1998 correction were almost identical to today’s market.
In 1998, prices put in a final peak in early July (check), fell in near free fall fashion to a low in late August (check), rebounded but ultimately retested the lows by late September (check) and then blasted higher starting in early October and never looked back (check???)
The magnitude of the market correction in 1998 was far more severe with losses of about 19% from highs to lows. Our recent correction was only 12% from highs to lows.
Finally, valuations in late 1998 were very close to those of today’s market with a trailing P/E multiple of 19 on the S&P 500 then and now.
So yes, I do see many obvious similarities between the 1998 market and that of today. The big question is whether or not this rebound will expand and develop into another strong year ahead like 1999, led by huge technology names. Seems to already be happening if you’ve looked at recent charts of AMZN, FB, MSFT or GOOGL. Today, I see a market that just turned green again for the year, with early breakouts to all time new highs in things like consumer staples and select technology. I also see a lot of underperformance relative to benchmarks among managed money with lots and lots of professionals lagging. With 47 market days left in the year, you can bet that the world of managed money will work extra hard and take extra big risks to “catch” the market which has surprised everyone with this recent rebound back up to the old highs.
Here’s a picture of the market correction in 1998 (middle of the chart just before the white pole where we could be in terms of today’s market).
That’s it for now – stay tuned as things are going to be pretty dynamic this week.