Rhyming, Not Repeating

A very positive element of aging is the ability to recall historical corollaries and potentially learn from them; this, coupled with my affinity for markets, history, and the arts, has me thinking about today’s markets. From an arts perspective, Mark Twain and others have pointed out that “history doesn’t repeat itself, but it does rhyme.” In capital markets, I’m drawn to indexes, and the current landscape calls to mind a 2011 analogy.

To be clear, this is meant to be observational, not analytical. In other words, there’s no implication that the potential similarities to a dozen years ago means the future path will resemble that of 2011.

The catalyst in my head was the Nasdaq-100 Index (NDX) requiring a “special rebalance.” Much has been written about the process, and one of the most digestible pieces can be found here. The last time it occurred was Q2 of 2011.

From my perspective, there are a handful of other interesting similarities between 2023 and 2011. There’s nothing prescriptive about this analysis, despite Mark Twain’s missives.

History

The global financial crisis in 2008 precipitated the sharpest decline in the global GDP growth rate since the World Bank started tracking the data in 1960. To combat the wreckage, the Federal Reserve (as well as other central banks) and Congress enacted massive stimulative programs. Equity markets responded positively. Between March 2009 and May 2011, the NDX increased by around 150%.

However, by 2011, inflation was a global concern that spilled over into unrest during the Arab Spring. Global markets declined as the U.S. dollar advanced. The NDX fell by around 20% in 2011. Budget deficits were growing and in August, Standard & Poor’s (S&P) downgraded U.S. credit for the first time ever. 

Rhyming?

In 2020, a novel coronavirus brought the global economy to a standstill. The decline in GDP became the worst in history. The response from politicians and central bankers was akin to twelve years prior…only bigger. Between 2020 and early 2022, there was an unprecedented amount of fiscal and monetary stimulus. Equity markets responded in kind. Between March 2020 and November 2021, the NDX added around 155%. 

However, by 2022, inflation measures were surging, and the U.S. dollar was at multi-decade highs. Global markets swooned with the NDX declining by around 37%. Presently, budget deficits and interest expenses are growing. In early August, Fitch downgraded U.S. debt from AAA to AA+.

Now What?

Thus far, U.S. equities have been resilient despite the debt downgrade. The reaction in 2011 was markedly different. As of August 10, the NDX is lower by about 3% month-to-date, but that could change significantly. In fairness, the sovereign debt situation in Europe (PIIGS) a dozen years ago compounded the macro uncertainty.

Indexes tend to exhibit greater realized and implied volatility between August and October. There was a slight increase in forward-looking vol measures early in the month, which have since receded.

An awareness of meaningful inflection points from the past can help us place current and future market events in perspective. There are a handful of similarities between the dynamics of this year and the tumult of 2011. There are also several distinctions. We’re reminded that the past is never indicative of future results. Leaning on Mark Twain again, “the only certainties in life are death and taxes.”

Options are flexible tools that allow end users to potentially benefit from uncertainty. If we had to add one more “certainty” – it would be that change is a constant. Learn more about how you can leverage Nasdaq-100 Index Options (NDX) to mitigate risk, generate income and maximize exposure to some of today’s most innovative companies.
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Originally Posted August 21, 2023 – Rhyming, Not Repeating

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