LIVE MARKETS-30% drawdown is not out of the question
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30% DRAWDOWN IS NOT OUT OF THE QUESTION
When market shocks happen, investors often look to past periods to better understand what might happen in the future.
The current episode has some market watchers harking back to the 1970s, which saw inflation peak, fall back and then spike again due to the 1979 oil crisis.
Current circumstances are making Dan Taylor, chief investment officer at Man Numeric, a tad nervous.
"Nobody likes to invoke the spectre of another Global Financial Crisis (GFC), but this scenario feels like a possibility if the conflict continues to pressure the energy complex," Taylor says.
"Given elevated equity valuations (particularly in the U.S.), slower growth and more normal valuations could result in a 30% drawdown."
While that's not his forecast, he believes it sits in the realms of possibility.
"Even at 10 to 20%, this tail risk is, frankly, still a bit scary, even to a seasoned market observer," he says.
Man Group's proprietary Macroscope model, which scans historical market regimes for similarities to the current environment, identifies the current backdrop as most similar to early 2011.
That was a period of late-cycle expansion with rising commodity prices (oil was above $110 per barrel) and elevated inflation expectations, notes Taylor.
The second closest match is late 1999, just before the dotcom bubble burst, which coincided with strong growth, rising rates and richly valued equity markets driven by momentum.
But there are differences.
"The current conflict involves variables that previous episodes did not: physical infrastructure, maritime chokepoints and an adversary with the means to sustain disruption at low cost," says Taylor.
"Historically, the resolution of geopolitical conflicts has been deeply bullish for risk assets," Taylor adds.
"But the increasing tail risk demands investor attention and concern. We are at nearly two decades of buying the dip being the right strategy; hopefully that is still the case."
(Samuel Indyk)
EARLIER ON LIVE MARKETS:
BARCLAYS GOES 30% ABOVE THE STREET ON ENERGY EARNINGS CLICK HERE
MIDDLE EAST TURMOIL POSES LIMITED THREAT TO EUROPEAN MEDTECH, RBC SAYS CLICK HERE
POSTPONED DOLLAR WEAKNESS CLICK HERE
A SHARPER US TREASURY SELLOFF IN TOKYO CLICK HERE
STOXX 600 HEADS FOR BIGGEST MONTHLY FALL SINCE JUNE 2022 CLICK HERE
EUROPE BEFORE THE BELL: FUTURES HIGHER ON IRAN DE-ESCALATION SIGNS CLICK HERE
SOME RESPITE FOR NERVY MARKETS AFTER BRUTAL MONTH CLICK HERE
