It’s certainly been a tumultuous time for global equities markets over the last few days, with stocks recovering some ground after ‘waterfall’ losses. The S&P 500 bounced more than 3% on August 9th to regain around half of the 6.6% fall from the previous day. The ASX 200 helped lead this gain, bouncing more than 7% from its low to the close.
Chart 1 – XJO Bounce
click to enlarge
This episode has been another reminder of just how short peoples’ memories are. Commentators on the business channels have made statements claiming this is the wildest action they have seen in their 20 or 30 years of trading or investing. But it was not all that long ago that similar movements occurred. During the GFC there were five trading days where the S&P 500 lost more than 6.5%. On four out of five of the following days, the market rallied more than 3%. And back in 1998 the S&P 500 lost 6.71%, only to then regain 3.86%. So the “20 or 30 years” claim seems a bit dramatic!
On five of the eight previous occasions that the market lost more than 6.5% in a day, it was higher 60-trading days (or roughly three months) later, for an average gain of 3.3%. As stated, four of those eight days were during the GFC!
Chart 2 – Performance After Large Drop
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It’s also been forgotten that previous US debt ceiling crises occurred in 2002 and 2003 - with the 2002 resolution going right down to the wire as well - and Standard & Poor’s timing for the credit rating downgrade seems questionable, to say the least. Clearly the US needs a reality check in terms of debt but it seems the Moody’s and Fitch ‘negative watch’ reaction was more appropriate. It is reasonable to suggest that if Standard & Poor’s had held off, the current episode would have been limited to concerns around Europe and been far less severe.
Comments by Representative Barney Frank this week reminded me of the movie ‘Inside Job’, which presented an interesting and somewhat sickening angle on the Global Financial Crisis and the credit agencies role therein. The Massachusetts Democrat said: “We have the people who helped cause the financial crisis now claiming that they’re the experts on what the American budget should be. It’s beyond their competence and I’m just puzzled that people pay attention.”
As hard as it might be for those who suffered margin calls or other squeezes, there may be positive consequences to the shock occurring in one hit. Certainly Washington will have to sit up and take notice and will hopefully be discouraged from using such important matters as political bargaining chips in the future, which was one of the reasons cited by Standard & Poor’s for their downgrade.
One big positive is that most of the bearish concerns are now clearly defined and established. The credit downgrade has been a topic of discussion for some time and the strength of the US economy has been in question during the entire rally from March, 2009, which is still in excess of 70% at the time of writing.
I am also taking perverse encouragement from the rapid return of long-term negative sentiment in the mainstream media. When you hear people with limited understanding of financial markets and economics talking about how bad the outlook is and using terms like ‘double-dip’ and ‘depression’, it suggests things probably aren’t as bad as they seem.