About That 1998 Analog and Y2K Scenario

Action in the forex and commodity markets is echoing with 1997-1998.

Nasdaq peaked at 2028 intraday on July 31. It fell to a low of 1475 on August 31, a drop of 27 percent. It rallied nearly 17 percent, then sold off again. It lost 23.6 percent in the second wave. The total drawdown at intraday low was 33 percent. The bottom was in early October, making for a nine-week crisis.

Few are thinking about a positive outcome, but there was real panic in summer 1998. The Federal Reserve organized a bailout of Long Term Capital Management. If coronavirus were a similar situation in time (with larger percentage moves), the bottom might come around the last week of April or first week of May. I'm not proposing that is going to happen, but it's worth keeping in the back of your mind. The final leg up was caused by Fed liquidity and also the destruction of the bears. Skeptics were calling the market a bubble before 1998, they were betting against Internet and tech stocks. The euphoria rally that followed was in part driven by the failure of a bear market in the face of a 33 percent correction.

The economy isn't heating up into a cyclical peak this time. Growth has been terrible for 11 years. Social mood isn't climbing into a major peak. It is arguably expressing a depression on par with the 1930s and even 1920s Weimar Germany. But the potential for an explosive bull move is not out of the cards yet, not until the virus pushes the economy into a clear recession that will not lift with the virus.

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