As investors around the globe try to gauge whether this month’s financial-market turmoil is a passing storm or a more-lasting disturbance, they are looking at two past periods of turbulence for signs of what could come next, Wall Street Journal reports.
Those two periods — the stock-market crash of 1987 and the downdraft of 1998 — bear striking similarities to the present. They also provide insight into the role of the Federal Reserve, which bolstered markets Friday, sparking a rally.
In both 1987 and 1998, stocks fell sharply starting in July or August and, although markets seemed to stabilise by September, they abruptly plunged again, and didn’t come out of their tailspins fully until October. Whether stocks will suffer a similar fate now, or escape it due at least in part to timely Fed action is the big question on investors’ minds.
In 1998, the Fed wound up intervening three times, because its first attempt proved insufficient. In 1987, the Fed didn’t intervene until after the crash, although when it did step in, it succeeded in stanching the bleeding.
This time, as in 1998, the Fed has tried to intervene before things get worse. But unlike Fed Chairman Alan Greenspan in 1998, his successor Ben Bernanke has taken a gradualist approach.
Yale economist Robert Shiller, whose book “Irrational Exuberance” appeared just in time to predict the bear market that began in 2000, sees unsettling parallels with 1987.
The market’s direction is much harder to read than it was in 1999 or 2000, Prof. Shiller says: “I’d say the odds are about 55 to 45” that the market’s declines have farther to go.
As in 1987 and 1998, one of the most unsettling aspects of the past weeks’ selloff is that stocks are falling and people don’t fully understand why. A big reason in each case was the role of computers programmed by people who were supposed to be market geniuses.
This time it was hedge funds using mathematical models, whose forced selling contributed to huge market swings and massive trading volumes over the past few days.
“It caused so much mass buying and selling that the market couldn’t easily handle it. It was almost like trying to get a stampede of elephants through a small door,” says Gordon Fowler, chief investment officer at Philadelphia money-management firm Glenmede Trust, who witnessed similar breakdowns in computer models in 1987 and 1998.