1998 Scenario Still in Play

Back in September I posted: It's 1998

Looking at various tops using the ratio of the Dow Industrials to the 30-year Treasury bond price showed:
All the overbought periods marked a short-term top in the markets (such as the 1987 crash). There was one exception: 1997. There was a dip in the stock/bond ratio in 1997, but it went on to a new high in 1998 before a major correction unfolded. Stocks would then go on to peak in 2000 as bonds bottomed, but as the ADX line below shows (black), the 1997 market decline marked the peak in stock/bond trend strength.

The difference between 2018 and 1998 is the trend strength is still rising. (The S&P 500/30yr ratio is already at a new high). Maybe this time is different (for the ratio) because bonds will lead the decline, but in either case a big correction in stocks looks very likely in the coming months.
Similarities with 1998 remain:
On December 26, I posted: What a Tantrum, Is 1998 in Play?
Bull scenario: the economy will hold up and avoid recession. Interest rates are rising and will remain elevated because there's no recession and core inflation will stay near 2 percent. The spike in volatility is the "equal and opposite" reaction of ultra-low volatility during QE, especially the final phase from June 2016 through January 2018. Investors expect low or even no volatility and an accomodative Fed. Investors were asking the Fed to stop hiking or even cut interest rates after a modest double-digit decline. They are behaving like coddled children throwing a tantrum and the Fed is the parent putting their foot down. Investors reacted by losing their minds, full blown on the floor kicking and screaming tantrum.

The Nasdaq fell 20 percent in 1998. Credit risk spiked in 1998, as it is spiking now. There are signs the global economy is weakening, but there were also clear signs in 1998 because that sell-off came at the tail end of the Asian Crisis. I remain bearish, but 1998 is the only non-bear scenario left. Even that scenario is not very bullish, since the top was 18 months after the 1998 correction.
There's a better macro case for bearishness in 2019, but everything is much less volatile because of central bank intervention. A rally here won't be as powerful as the final 18 months of Dotcom Bubble for the same reason East Asian economic activity hasn't imploded.

Chartists at Bank of America also see a 1998 rhyme. ZH: Is This Just One Giant Bear Market Rally? Here's What History Says
Interestingly, the Aug-98 event was one of the early scenarios when the Fed cut rates to fight market weakness. It is worth noting that while the Fed has not cut rates - yet - in the most recent bear market rally, the catalyst for the rally was the Fed's reversal from a hawkish tightening bias to a dovish one, where the Fed said it would adjust the shrinking of its balance sheet and would be "patient" about future rate hikes. In other words, the two fastest bear market rebounds in history were both the result of direct Fed intervention. It goes without saying that while the 1998 rally persisted for several years, it eventually culminated in the dot com bubble and the first Fed-induced bubble burst.

How and when the current bear market rally (and bubble) ends, is still unknown.
The Fed cut rates in 1998, but commodities and East Asia had just bottomed. The Dotcom Bubble accelerated. The Fed also had some ridiculous reasoning for its cut, namely fear of the Y2K bug. It also held rates low for too long. As soon as the Nasdaq achieved a new high (three months after bottoming), the Fed should have realized its error, but instead it would not set rates above September 1998 levels until February 2000, one month before the Nasdaq peaked.

This time the Fed hasn't cut rates. It could and should put June rate hikes on the table as a shot across the bow of speculators. It probably won't, but it could without reversing policy or even committing itself to a hike. It probably will hike in December if economic growth stabilized. That in turn should lift the U.S. dollar and short-circuit any rally.

Another view: Jeffrey Snider at Alhambra posted this chart comparing the CPI in the 1990s to now. What Is Missed Inflation
Clear as mud some would say, but if you're time frame is 18 to 24 months, it doesn't really matter. The bull market is either dead or on its last leg.

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