Investors have had a whirlwind couple of weeks, starting with the Saudi oil attack and rolling into a formal presidential impeachment inquiry.
Add reports of strain in the credit market, a high-stakes Fed meeting, overheated tech stocks and persistent gloom about Treasury yields and the economy, and you’d think the world was ending.
But replace Saudi Arabia with Iraq and I could have described 1998. The same factors were in play. Business conditions looked fragile and politics were breaking down.
It looked like a global recession was brewing. Instead, the economy kept expanding all the way into 2001, at which point the longest boom in history finally ended.
And investors who sold their stocks when the president was impeached missed out on a 17-month rally that took the S&P 500 from a lowly 970 to what was then a stratospheric 1,500, generating 54 percent profit in the meantime.
Impeachment clearly didn’t trigger an immediate crash then. From what I’m seeing on Wall Street now, the recent events are a stronger buy signal than anything else. At worst, those who hold on here will ultimately see their tenacity rewarded.
From Curve to Congress
While 1998 is practically ancient history, the parallels are worth a trip down memory lane. When President Bill Clinton finally got served his impeachment articles, the market had good reasons to be unsettled.
The Treasury yield curve was a mess, with six-month bills paying higher interest rates than 10-year bonds. People were worried that this fact meant a recession was coming.
After all, with once-legendary hedge fund Long-Term Capital Management imploding, global markets were in unknown territory. The odds of a total meltdown were high.
That’s why the Fed was busy guiding interest rates lower to cushion any shock to the system. Back then, it was Alan Greenspan who got ahead of inflation, raising the funds rate to 5.5 percent in 1997 before taking back 0.75 percent in 1998.
He wasn’t afraid of a recession. While gross domestic product growth actually accelerated to 4.5 percent, with inflation at 1.7 percent (almost uncannily close to where it is now), there was simply no compelling reason to keep interest rates high.
It worked. By the end of 1998, the inversions in the yield curve had flattened out. Credit markets got back to work.
And while the impeachment hearings dragged on into February, Wall Street barely noticed. I already see something similar playing out now.
Over the last two weeks, the S&P 500 has barely budged beyond a 2 percent trading band. The Fed has been supportive and trade talks are scheduled to start soon, which balances out all the anxiety elsewhere.
Keep Your Eye on the Ball
Congress can keep talking. Wall Street doesn’t mind. We’re more about business than buzz. Anyone who gets consumed in the noise is thinking like a passive media consumer and not an investor.
Remember when James Comey was fired? I was at an investment conference and trying to prepare a presentation in my hotel room that morning. At the same time, I was watching the Dow Jones Industrial Average plunge when the market opened.
The world didn’t end. That 373-point decline didn’t even take 2 percent off the market. According to the recent standards of volatility, it barely qualifies as a speed bump.
Years of unnatural quiet had unhinged our expectations. Now that we’re back in the real world, the Dow can lose 373 points in the normal course of business and nobody even tries to come up with an explanation.
It’s just part of the usual give and take. Markets go up, markets go down.
Besides, the chatter is good for Twitter Inc. (NYSE:TWTR), especially as we look toward an extremely noisy 2020 electoral season.
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