This market is more 2011 than 2008, say analysts, complete with ‘quite severe’ rolling bear market

Financial markets have been flashing a lot of warning signs in the past month that have spooked investors and led to a flight ticket from risk for much of this year, drawing parallels to the economic crisis of 2008.

Like that year, banks would be 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 what happened this year, say analysts.

On Wednesday, reports from both National Bank Financial Markets and Citigroup drew parallels between this season and the volatility flare up five years ago, when the European sovereign debt crisis roiled markets and brought the S&P 500 to the brink of a bear market.

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“2011 seemed to be a period of heightened volatility in markets accompanied with fears of a global recession,” said Ste?fane Marion, chief economist and strategist at National Bank Financial Markets. “At the time, concerns in regards to a potential recession were centered on Europe.”

Many from the financial market recession indicators that crept up 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 one another.



 

Tobias Levkovich, chief U.S. equity strategist for Citigroup asserted the majority of the sentiment metrics and stock exchange moves fall into line perfectly with what was seen 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 prices,” he said.



Levkovich adds that there’s a “quite severe” rolling bear market underway at this time, reflected in the punishment that banks and energy stocks take. The amount of stocks down 30 per cent or even more off of their 52-week highs has returned towards the levels observed in 2011 and 2012. Rolling bear markets are concentrated in certain sectors rather than synchronous market decline.

While there are many parallels between 2011 and now – European bank liquidity for instance is within focus at this time because of the fears surrounding Deutsche Bank – there’s two main market determinants within the coming month is going to be China and the U.S. Federal Reserve, says Marion.

China will provide its upcoming five-year plan in mid-March, which will offer markets more concrete information on how the country is steering its economy into what is a hoped-for soft landing. The Fed, meanwhile, will give you more clarity about its monetary policy and also the path of rate hikes this year.

In the interim, Marion does not expect an imminent economic crisis and subsequent recession to sideswipe markets.

“We would reason that the present level of financial pressure is the wrong size to topple the worldwide economy into recession,” he explained.