This is the S&P 500’s chart in 1998.
*Read the entire history of the U.S. stock market here.
The first half of 1998 was very quiet in terms of news, which is good for stocks. The S&P rallies the most when there are no geopolitical or financial fears in the world. There were still some reverberating effects in 1998 from the 1997 Asian financial crisis, but the S&P completely ignored this.
Our model stated in March 1998 that a big correction would begin ASAP. The S&P consolidated from April – June 1998, and we thought that this consolidation was the beginning of the big correction. Instead, the S&P made 1 more rally from mid-June to mid-July 1998. Then the big correction began.
Russia’s financial situation began to deteriorate in June while the S&P was rallying vigorously. This divergence draws parallels to February-April 2010, when the S&P went up despite deterioration in Greece and Europe.
June 1998: Russia hiked short term government bond interest rates to 150%.
June 12, 1998: Japan officially announced it was in a recession for the first time in 20 years. The S&P completely ignored this news. Unlike what some pessimists feared, Japan’s recession did not have any negative impact on U.S. economic growth. There are parallels between this and 2015. In 2015 investors feared that China’s economic slowdown would dampen U.S. economic growth, but it didn’t.
July 13, 1998: A $22.6 billion bailout package by the IMF and Worldbank was approved for Russia. But Russia had to pass new tax legislation through Russia’s parliament in order to secure this aid.
July 21, 1998: Russia failed to pass these new austerity tax legislation. The IMF reduced the size of its bailout package because Russia failed to meet the terms of the deal.
July 20 – August 4, 1998: Contrary to popular belief, the first wave of the S&P’s big correction happened on Japanese worries and not Russian worries! Japan couldn’t pass tax cuts or legislation to boost its economy and prop up the Yen. The U.S. dollar went up and the Yen went down. The S&P started to go down because people feared that “Japanese economic problems would hurt the U.S. economy and U.S. corporate earnings”. These fears were pure BS, but the S&P did fall 11% while these fears were in the media’s headlines.
August 5 – August 26, 1998: the first wave of this big correction ended, and the S&P bounced just above its 200 simple moving average.
August 13, 1998: Russia’s stock market started to collapse and George Soros wrote an open letter saying Russia should devalue its currency.
August 14, 1998: Russia’s president said that Russia would not devalue its currency, but people didn’t believe this any more.
August 17: Russia effectively devalued its currency and defaulted on its debt. The Ruble instantly fell against USD. Contrary to popular belief, the S&P did not go down when Russia defaulted! In fact the S&P went up a little bit for 3 days.
August 25, 1998: Russia announced details on how it will restructure its debt.
August 27-28, 1998: Russia’s central bank suspended all currency trading on Moscow exchange. But the Ruble still was crashing in non-Russian currency exchanges.
August 27 – September 1, 1998: The S&P’s second DOWN wave in this big correction happened on no fundamental reason/news. It occurred purely because our model said that a big correction would happen. The S&P crashed more than 7% on Monday, August 31. The S&P fell on the Thursday and Friday before this.
The S&P bottomed on September 1, 1998 for no apparent news. The S&P’s bottoms often happen on no news. They bottom for technical oversold reasons.
There were problems with Latin America too because all emerging markets were getting hammered. On September 3, 1998 Columbia devalued its currency by a little more than 10%.
September 4, 1998: in an evening speech on in a speech,Greenspan hinted he might cut rates at the Fed’s meeting on September 29.
September 24, 1998: The final retest wave for this big correction began. This retest wave began on September 24, which is when the world learned that LTCM would be bailed out. LTCM was a big U.S. hedge fund that imploded on Russia’s problems.
October 8, 1998: the S&P officially bottomed on new news/fundamental reasons.
October 15, 1998: The Fed surprised markets by cutting rates today, which was between 2 regular FOMC meetings. The S&P immediately soared on this news.
The S&P also went up from mid-late October because of Q3 1998 earnings season (released in October). Earnings reports were mostly good.