The Asian financial crisis was exceptional. Not just because it was my first financial crisis… and not just because I experienced it firsthand, as I explained in yesterday’s essay.
It was exceptional because of the way things played out.
It started as a country-specific problem, then quickly engulfed an entire region. What seemed like a strong economy was quickly turned on its head… And then more dominoes fell. The devastation was immense.
In many ways, the market “contagion” we experienced back then reminds me of what’s happening in stocks today.
Fortunately for us as investors, those similarities mean we can learn a lot from what happened back then. We can use the past to build a blueprint for today’s crisis.
Let me explain…
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This chart of Asian stocks (excluding Japan) during the Asian crisis gives a decent summary of what we can expect today…
It’s not a perfect example. Things will certainly be different this time. But overall, it’s a powerful guide.
Asian stocks fell from about 400 points in 1997 to about 150 points in 1998. Said another way, if you had $400,000 invested at the peak in 1997, you were left with just $150,000 at the bottom in 1998. Take a look…
I see two things here…
- The downturn can take longer than you can imagine, with stocks falling farther than you can imagine.
- Recovery is not only possible – it can be relatively large, and relatively swift.
This is the kind of pattern I believe we’ll see this time around. One important point here, though…
I don’t want you to start expecting the recovery yet.
We are more likely in the start of the downtrend now, for the reasons I outlined yesterday. The crisis is still the only thing on investors’ minds… And as long as that’s true, the selling can continue.
I am not predicting a fall as severe as what Asia experienced, or for it to last as long. But the reality is that I don’t know how it’ll play out this time. No one can know for sure. We are truly living in unprecedented times. Chances are, things will get worse before they get better.
What we do know is that the crisis won’t last forever. And if we combine this with the script I laid out yesterday for finding market bottoms, we know where to look for signs of the turnaround.
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So, our blueprint is this…
First it’s in the news. Then it isn’t. Then people give up. Then it bottoms… And then it roars back.
In the case of the Asian crisis, the bust lasted more than a year. That’s not long in the grand scheme of things. But when you’re living it, day by day, it’s an eternity.
Consider that the coronavirus worries only began dominating the news in the U.S. about a month ago… And the U.S. stock market peaked just six weeks ago. Six weeks!
I don’t know about you, but it feels like much longer than that to me. And in the last two weeks, there have been no other news stories. Everything is framed around the virus and its disastrous impact… on people, the economy, and the markets.
So, if you look at our blueprint, we’re clearly in the first stage, where investors can’t stop talking about what’s happening on Wall Street. That’s not how bottoms form.
It could take a few weeks – or a few months – for people to stop talking about Wall Street. Only then can the market finally bottom.