Is This Current Market Turmoil Really Different?

There is a broker in my office who has been in the business for almost 30 years and he told me that the market action since August of last year has been more frustrating than some other periods of market turmoil (the 1987 stock market crash and the tech bubble being the two periods sticking out in my mind). This had me wondering… Since the actual magnitude of the correction was less than 20% (at least in Canada) this time around, what made this particular period more frustrating than others? From a sheer numbers point of view, the 1987 stock market crash would seem ‘scarier’ on the surface with a similar loss occurring in only one day, and the tech bubble was a roller coaster both on the way up, and on the way down lasting years.

Part of me wants to write off the sentiment as a function of recency, meaning that since this was the latest correction it creates the most emotional distress simply because it was the most recent and nothing more. And perhaps the reason that it stings more than the past events is that the past events have not only been analyzed to death, but we are very much well past them. They were terrible as they were happening, but the markets prevailed and new record highs have been attained since then.

There is a certain amount of trepidation as to what lies ahead since oil and other commodities are on a seemingly unsustainable tear, and the normal portfolio stalwarts one turns to in uncertain times are generally the blue chips which have decidedly taken it on the chin in this round. So is it really different this time? Should we abandon financials and overweight energy and other commodities?

I don’t know if I would be so hasty. In fact, what is happening now is not really new at all. It is, however, recent. Would your perspective change if you knew that the financial sector has had four separate 40% sell-offs since 1989 in the US? Or that oil went from just below $40 to just above $10 from 1981 to 1986? It also had a retreat from about $33 down to about $9 from 1991 to 1999. Also, don’t forget what unit of currency oil is priced in: the US dollar. And what has been happening to that? It’s tanked. So while the value of Oil has been going up on a trade-weighted dollar basis, the fact that the unit of currency it is priced in has been going down has served to exacerbate the optics of it all.

Yes, the current market has been trying for many investors – but they were trying during past volatile market crises as well. While the exact details and dynamics of the current market are indeed different, this too shall pass. Once it is behind us, we will soon have countless studies analyzing everything that happened, and years from now we will mention the ‘sub-prime crisis’ in the same breath as Black Monday and the Tech Bubble.

I wonder what the next crisis will be called?

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Leslie

    I’m an interested observer of human behaviour in the markets (i.e., economics), and agree with Santayana that those who ignore history are doomed to repeat it.

    This looks like 1981 all over again, although both Canada/US central banks seem to have shifted their focus to inflation so hopefully we won’t see the same kind of recession. The 80s were brutal.

  • Wayne

    The next US home-grown crisis is probably going to be in the Credit Default Swap market.