Is It Fair to compare this sell off to the Great Recession of 2008 and 2009?
Sort of, Kind of, and not really. No Baby, No bathwater, not yet.
Let’s check the tape. SP500 at the peak of the “unrest” in the crisis was at 666.79, March 2009. Dollar index (DXY) during the same week was 89.522.
Conversely, March 2008 DXY was at 70.698. SP500 was 1325.61 during the same time period. The high for the SPX before the crisis was 1578.11. From the high to the low of the crisis the SPX index fell 57.74%. (1578.11-666.79/1578.11)
Crisis SPX volatility
The DXY increased 26.63%. (89.522-70.698/70.698)
DXY crisis volatility
Let look at the current situation, numerically. High of the SPX before this sell-off was 2019.26. Let’s suppose we close near the 1850 levels. From this recent high to current levels, we have a sell-off of 8.38%. Apples to Apples, we have about 1/6 of the move from 2008.
Recent SPX volatility
Recent DXY volatility
Let’s bring the dollar back into the picture. We can infer that the DXY was at 78.906 (May 8, 2014) October 3, 2014 the DXY hit a high of 86.732. The increase in the DXY was 9.91%. The recent increase is 37.21% of the move during the crisis of 2008.
Equating the DXY increase with the SP500 decrease (26.63/57.74) we get a factor of .4612. Equating the current situation (9.91/8.38) we get a factor of 1.1826. In order this market to react in a similar way as in 2008/2009 we would need the SPX to move 21.49% lower from the high of 2019.26. This would mean the SPX would need close at 1585.32 to make the equation work. And yes, this would put the index in a bear market.
Economically and philosophically speaking, the two situations are difficult to equate. The Great Recession, The Crisis of 2008, The 2008 Depression, whatever you want to call it, the impedance for the event was on several fronts. Over bloated lending mechanisms, consumer mortgage based debt, Asset Bases Securities (ABS) euphoria, popularity of Collateralized Debt Obligations (CDO), rampant involvement in Credit Default Swaps (CDS) by institutional and Hedge Funds. At the peak of this euphoric period, the notional value of ABS, CDS, CDO held by investors was 14-16 times global GDP. To complicate matters, the internals of CDO’s held highly suspect securities and reaped the benefit of high ratings from trusted analysts. These CDOs found their way into balance sheets of banks, funds, and government entities.
The crisis was not only a perfect storm of complication and insolence but involved multiple industries and worked perfectly into the disruptive nature of events. Since then we witnessed a deleveraging by investors across the globe. The perception of risk and ratings on securities has changed. BASEL III has now entered the picture and financial institutions have revamped their Tier 1 ratios to comply with the new regulations. As a side comment, perhaps this is why we have a bid in the 10 year US notes. But that is a topic for our next article.
Let’s return back to the present. Do we have a market addicted to QE? Yes. Commodities, Energy, and Raw Materials have dropped significantly in recent weeks. What is this reason behind this drop? Potential recession in Europe, Chinese economic slowdown, OPEC countries jockeying for position to gain market share? Are these inter-industry, potentially disruptive events? Not sure, yet.
Putting things into perspective: Here is a slight philosophical and macroeconomic opinion on developed G8 category economies. No matter where the leading economic are pointing to, a developed economy has a set amount of implicit activity to sustain some level of growth. Short of a cataclysmic or debilitating event; i.e. a full pandemic EBOLA outbreak that has infiltrated a New York, London, Paris, etc; economic activity will churn to some degree to sustain some semblance of an isolated GDP.
Let’s recap: We do not have a banking crisis on our hands. We do not have a systemic financial crisis. We do have a softening of global macro-economic growth. Certainly, the recent memory of the crisis conjures up unpleasant and extremely volatile conditions.
A check of oil: Although we did not provide analysis of oil in this article, suffice it to say that oil’s low during the crisis of 2008/2009 was $33.2. The high was $147.27. This current oil swoon took us from $107.21 to current levels of $81.66. Certainly, this has been a tighter range of momentum.
The dovetail risk: EBOLA. This is the only non-quantified aspect of most trader’s models and algos. This would be a very difficult scenario to quantify with respect to markets, domestic and global economies. Since we live in an interconnected world, the fact that EBOLA has reached industrialized countries should not be a huge surprise. The objective is to quantify the potential disruptive nature of EBOLA on society and the functionality of economies. Could this be the proverbial Black Swan? Maybe. From a social and humanitarian perspective, this is the last thing we need. This is the possible inter-industry, inter-global economic disruptive event.
If we continue to receive news that EU countries are at the ready for possible QE-like actions and “dovish” sentiment from the US FED, we will most likely avoid a major relapse of the macro markets. The proverbial “bid” in the market.
We will certainly continue with the volatility but instinct and a bit of history dictates that rational thought should supersede “fear”, just don’t forget about EBOLA.
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