The financial markets were convulsing with worry about a slowing economy, and the Federal Reserve chairman sought to reassure investors the central bank got the message.
"A complex business cycle process is underway, whose outcome is yet to be determined. For the Federal Reserve it is a time... to gauge whether policy is still appropriately positioned to foster sustained economic expansion...It is clear, especially in the last month or two, that inflationary pressures are easing."
The chairman was Alan Greenspan and the year was 1995, shortly after the Fed had halted a year-long tightening campaign that investors feared might have gone too far.
But it could also have been Janet Yellen, who as chair said this in early 2016 not long after a controversial December 2015 rate hike left markets unsettled: "I consider it appropriate for the committee to proceed cautiously in adjusting policy…The decline in some indicators has heightened the risk that" growth could falter. "If so, the return to 2 percent inflation could take longer than expected and might require a more accommodative stance of monetary policy."
Not so different from Chairman Jerome Powell last week, using a form of the word "patient" eight times in conveying policy flexibility after a December rate hike - and signals of more to come - unnerved markets.
You get the idea. Over more than three decades and four Fed chiefs, there have been a half-dozen sharp market downturns driven by a growth scare, outside of a U.S. recession. In each case, the market retrenchments relieved valuation pressures, punctured investor confidence, led to moderate growth and tame bond yields — and forced central bankers to pause tightening programs or even to ease policy.
The bullish case for stocks today rests on the expectation that the 20-percent bungee-jump late last year will prove another one of these "baby bear" markets that was a false recession alarm and will give way to a "just-right" Goldilocks growth phase and release stock prices toward new highs. A probable script, or a hackneyed tale too good to be true?
Tony Dwyer, strategist at Canaccord Genuity, has been characterizing the late-2018 collapse as the fourth "non-recession market crash" of the past four decades, using 1987, 1998 and 2011 as the relevant precedents — with bullish implications longer term but a hint that another short-term retreat might be needed.
The 20-percent break in the into late December, Dwyer argues, "more than discounts the slowing domestic and global economy, as long as the Fed stops making policy and communication mistakes, the Trump administration resolves the trade conflict with China, and the yield curve remains positive."
Retest coming first?
He notes that once the scary, climactic low was reached those prior instances, stocks had a sharp rebound rally of between 12 percent to 19 percent over the course of weeks, then slid back toward the lows in some type of "retest" pattern roughly a month later.
The current rally is on the stronger and longer side of those earlier recoveries, and has ignored upside resistance levels so far in rising 15 percent in less than six weeks, causing many to abandon the call for a standard "retest" pattern — for better or worse.
Lori Calvasina at RBC Capital also reaches back to earlier cycles to note that the compression of equity valuations last year — from a trailing price/earnings multiple above 22 to around 16 at the low — roughly matches the typical revaluation that occurs over a Fed tightening cycle.
And Fidelity macro strategy chief Jurrien Timmer has noted for months how the internal market dynamics — huge split in performance among stock sectors, nasty underperformance of small-cap stocks — mirrored the "internal bear market" of 1994. He is now also citing the 1998 and 2011 story lines: Something "breaks" in the capital markets as central bankers snug up policy, until monetary authorities relent and risk assets reflate.
Current Fed chairman Powell himself invoked the Fed's policy of flexible forbearance starting in 1995 at an admiring August speech at the Jackson Hole symposium, before financial markets cracked:
"Under Chairman Greenspan's leadership, the committee converged on a risk-management strategy that can be distilled into a simple request: 'Let's wait one more meeting; if there are clearer signs of inflation, we will commence tightening.' Meeting after meeting, the committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined."
This approach allowed the tech-propelled productivity and capital-investment boom of the '90s to unfold, without a surge in consumer inflation. And, yes, it also coincided with the buildup of a titanic equity-market bubble leading to a market top in 2000 that would scarcely be exceeded until 13 years later.
Stay paused?
It will only be knowable in retrospect whether the 2018-'19 sequence merits a comparison to those post-crash economic soft landings and market revivals of yore.
Friday's strong employment report already raises questions of whether the Powell Fed will find cause to stay patient for long before restarting its rate "normalization" efforts. And, of course, the Fed has also paused ahead of recessions - and that doesn't rescue the stock market. Note that the pauses of 2001 and 2006 aren't on that table above of deft policy moves leading to happy outcomes.
Even if the Dec. 24 depths prove a good market low for the foreseeable investment horizon, it's hard to conceive what might liberate investors from the "late-cycle" psychology that says time and productive capacity are running low for this expansion.
It's worth noting, though, that at the time both of the 1987 crash and the 1998 market panic, the U.S. economy was also in what qualified at that time as its longest-ever expansion and there were constant worries that the end was near.
So, for investors still shaken by the December descent that has not even fully been undone by the recent 15-percent S&P 500 rally, history can provide some comfort and food for thought — but offers no guarantees.
