A Russian Future?

Are we facing a Russia-moment?

On August 17, 1998 the Russian government devalued the ruble, defaulted on domestic debt, and declared a moratorium on payment to foreign creditors. By October the stock market had fallen over 20% from its high and the 10-year US Treasury market had rallied about 1 ½ percent. Market volatility rivaled that of October 1987. Economists couldn’t see a way out for Russia—and they were right. Its economy didn’t begin to recover until 2000, and didn’t get to its prior peak until 2003.

How soon we forget. A financial crisis in Europe led to a market decline here, in spite of solid domestic economic fundamentals. The US equity market recovered by year-end and we enjoyed another three years of growth. The stock market ultimately rose 30% above its previous high.

Fast forward 13 years: a significant debt restructuring is in the offing in Europe, equities have fallen off their peak, the Treasury market has rallied, and volatility is extreme. But US companies continue to exceed earnings expectations. So far this earnings season, over 90% of companies in the S&P 500 have exceeded expectations. The economy is still growing: we have 1.2 million more jobs that a year ago, consumer credit is growing, and industrial production is improving.

Yes, global growth is slowing. Yes, the markets have been volatile. But oil prices are down, inflation pressures are easing, and consumers are spending. We’re seeing evidence of financial stress, but it’s more like 1998 than 2008. The situation may not yet be in hand, but this is no time to panic.

Douglas R. Tengdin, CFA
Chief Investment Officer
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