Recent market volatility has dredged up memories of previous times of turmoil, most notably the 2008 crisis. But Gina Martin Adams of Wells Fargo Securities has been reminded of another, less dramatic correction year — 1998.
Adams posits that the current economic environment is suffering from themes that also played out in 1998, including falling oil prices, a rising U.S. dollar and troubles in emerging markets. Consequently, stocks may see a similar move to the 1998 correction, which saw a 20 percent drop for stocks over six weeks.
"Despite these somewhat worrisome signals from the intermarket, the broader economy appears to be holding up reasonably to struggles of the oil and gas complex, deteriorating export growth, and evidence of manufacturing recession, suggesting domestic recession is still likely to be avoided," Adams, an institutional equity strategist, wrote in a Thursday note.
She believes that although a correction this year would likely be more drawn out and less extreme, large-cap stocks may see another 8 to 10 percent decline.
"If the relevant domestic economic data turns over ... we would be forced to change our tune. For now, we suggest investors should continue to add positions in quality and momentum stocks," Adams said.
Looking at the options market, Stacey Gilbert of Susquehanna, said that the 1998 comparison is also congruent with the past week's volatility. As stocks fell 6 percent over the worst first trading week of a year in history, Gilbert noted that the CBOE Volatility Index (or the VIX) stayed below 25, which did not point to market panic.
"If you look at 1998 and the types of pullbacks that we saw, the types of volatility that we saw, it is more similar to what we're seeing now" [than 2008], Gilbert, head of derivatives strategy, said Friday on CNBC's "Trading Nation. " "That is a fairly orderly sell-off. It is no panic, it is not this crazy run for the exits."
According to Albert Brenner of People's United Bank, emerging market debt is where the 2016 story differs from 1998. In the previous term, Brenner said that emerging market debt was predominantly from Latin America and below investment grade. Nowadays, those investments are more evenly divided among mostly investment-grade debt from European and Asian emerging markets, he said.
"Could it get to look like 1998 again, with commodity prices down and weak growth in China? It's not out of the realm of possibility, but I think it's remote at this point," he said Friday on "Trading Nation."
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