The selloff in the markets the last few days has financial pundits and analysts drawing comparisons between the current market environment and what was going on in the summer of 2011 when the S&P 500 plummeted following Standard & Poor’s downgrade of US government debt, which happened to coincide with renewed crisis in Europe, which threatened to spread to the global economy.
Let’s examine 2011. In late July, the S&P 500 had doubled off the Great Recession lows of March 2009. However, the economy was still relatively weak, and many were wondering whether the economy and the stock market could continue to advance without extraordinary stimulus from the Federal Reserve’s quantitative easing (QE) program, which had ended earlier in the year. At its low point that August, the S&P 500 had dropped about 16.5% from its July high. The contagion risk from Europe seemed to have spilled over into the US economy as the jobs report for that August indicated that a net zero jobs had been created. There were many articles talking about the possibilities of a double-dip recession.
Fast-forward to August 2015, and the market is once again in a panic because of a meltdown abroad, this time in China. The S&P 500 has fallen from its all-time high of 2,134 in May to a low of 1,867, for a drawdown of about 12.5%. By just about every metric, the fear is very real and palpable. The volatility index (VIX) has spiked, sentiment has plummeted, and there were signs on Monday the 24th (the selling climax) that investors were selling whatever they could for whatever prices they could get. For example, Home Depot (HD), – a company that ended its presence in China in 2012, – opened the day at $110, bottomed out at $92, and closed at $115. Home Depot had been one of the better performers in the Dow in 2015, and the action in its stock seems indicative of funds liquidating on margin calls.
Economically speaking, it seems beyond dispute that the US economy is much stronger than it was in 2011. Take for example unemployment, which has dropped significantly since 2011:
Then there’s the ISM Non-Manufacturing Index, which soared last month:
Finally, there’s the Truck Tonnage index, which, as Scott Grannis has pointed out, historically has a high correlation with the stock market. The reason for that is that it represents real activity within the economy. As Ed Yardeni wrote earlier this week, this index is approaching the all-time highs it hit in January, confirming the strong ISM report, and showing renewed economic strength. You can see in the chart below how closely the Truck Tonnage and the S&P 500 track each other:
In summary, August 2011 and August 2015 have had similar market selloffs, but the US economy is clearly stronger, and should survive this latest bout of global drama.
