Financial markets have been flashing lots of indicators in the past month that have spooked investors and resulted in a flight from risk for point about this year, drawing parallels to the economic crisis of 2008.
Like that year, banks are the big focus, with investors now selling off U.S. and European banks around credit fears.
But while you will find shades of 2008 here, this is actually a repeat of the items happened in 2011, say analysts.
On Wednesday, reports from both National Bank Markets and Citigroup drew parallels between this year and also the volatility flare up 5 years ago, when the European sovereign debt crisis roiled markets and brought the S&P 500 towards the brink of a bear market.
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“2011 was also a time of heightened volatility in markets accompanied with fears of the global recession,” said Ste?fane Marion, chief economist and strategist at National Bank Markets. “At that time, concerns about a potential recession were dedicated to Europe.”
Many of the financial market recession indicators that crept in 2011 are flashing today. Widening credit spreads in non-investment grade bonds, rising negative sentiment and peak-to-trough performance in global stock markets are near mirrors of each other.
Tobias Levkovich, chief U.S. equity strategist for Citigroup asserted most of the sentiment metrics and stock market moves line up perfectly with what was observed in 2011.
“With most data not implying an imminent U.S. recession, such as the latest small company hiring intentions and rising open job listings, the comparisons to 2011-12 seem appropriate including sentiment metrics and collapsed stock values,” he said.
Levkovich adds that there is a “quite severe” rolling bear market underway at this time, reflected within the punishment that banks and energy stocks are taking. The amount of stocks down 30 percent or even more from their 52-week highs has returned to the levels seen in 2011 and 2012. Rolling bear markets are concentrated in a few sectors instead of synchronous market decline.
While there are many parallels between 2011 and now – European bank liquidity for example is within focus at this time given the fears surrounding Deutsche Bank – the two main market determinants within the coming month is going to be China and the U.S. Federal Reserve, says Marion.
China will approve its upcoming five-year plan in mid-March, that will offer markets more concrete information on how the country is steering its economy into exactly what is a hoped-for soft landing. The Fed, meanwhile, will provide more clarity about its monetary policy and the path of rate hikes this season.
In the interim, Marion does not expect an imminent economic crisis and subsequent recession to sideswipe markets.
“We would argue that the present degree of financial stress is not high enough to topple the worldwide economy into recession,” he said.
