The past month feels eerily similar to mid-summer 2008. But it’s a bit of a remix. Back then, I remember quite vividly, many investors acknowledged that the U.S. banking system and housing market were in shambles, but talked optimistically about global growth in BRIC-oriented countries and industries. Few remember now, but many commodity-oriented stock markets did not peak until May 2008 (Brazil, Russia, and Canada are 3 examples).
Here is a chart of Brazil vs. the S&P 500 in 2007 and 2008 (I used Brazil as a proxy for the decoupling story from 2008, but Russia, Canada, or smaller emerging markets like Indonesia or Mexico looked very similar). Note the incredible initial outperformance (and hence the chorus of prognostications for de-coupling), and the subsequent rapid re-coupling over the course of a few months:
Incredibly, over the course of a 5 month period, most emerging markets like Brazil fell by more than 50%. I do not bring this up to fear-monger. I only want to point it out because today’s global interconnectedness behooves all of us to follow other markets for clues. Brazil and Russia seemed like safe havens of demand in May 2008, ignoring the numerous signs of weakness in developed markets and global financial stress. Fast forward to today, and the U.S. market feels like a safe haven of demand (best seen by this chart yesterday from Bespoke), potentially ignoring the numerous signs of weakness in emerging markets and global financial stress (this time centered in Europe).
Regardless, I want to let markets be my guide rather than over-anticipate. Price action this month in global currency and bond markets, which I’ve noted here and here, has me thinking back to the swift catch-up played by those emerging market stocks in 2008. It’s why most of my recent focus in my own trading has been very macro, as micro stories will be swept up with the macro tide in a time like this. And it’s why I remain a biased buyer of options for the time being. Remix indeed. History does not repeat, but it does rhyme.