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Financial Markets volatility: Could this time be different?

September 21, 2015

In the year 1956, American geophysicist M. King Hubbert wrote an extensive research paper on the rate of petroleum production. According to his calculations, world oil production would reach a peak in 1970, and then it would begin to decline. It was later observed that while the “Hubbert peak theory” had value, it failed to take into consideration developments in technology that would allow oil producers to drill deeper and at different angles, or literally squeeze oil from rocks (fracking) or extract the commodity from sands, just to mention a few of the new ventures available that has increased production considerably. In other words, the “Hubbert peak theory” failed to take into account American Ingenuity, Entrepreneurialship and Resourcefulness.

 

When analyzing the recent volatility of the Stock Markets, many have made comparisons to what happened in previous years and while there is value in re-visiting history, every era brings a difference worth examining as economic and technical conditions are far from similar, so the outcome should prove to be different. Advances in technology, the spread of social media and the impressive creativity of our young entrepreneur generation must be considered as their impact in the financial world has certainly made significant changes, thus the outcome of recent events may not resemble at all what happened in the past.

 

 

                                 Source: Bloomberg

 

The above graph points to the following:

1. The time for the market to recuperate from a “bubble” has shorten.

a. The “DOT Com Bubble”. It took the market approximately 7 years to get back to positive territory

b. The “Housing Bubble”, in 5 years market was back in positive territory

c. The “European Debt Bubble”, in less than 6 months market had erased all loses

2. In every instance, markets more than made up losses, edging much higher in all occurrences

3. The declines have also shown to be less traumatic

 

As for the economic conditions for each of the years when a “bubble” occurred, it is possible to find significant differences.

 

 

 

If we take a look at notable events that occurred during the “crisis years” that impacted the performance of the stock markets, the following are worth mentioning:

• 1999: 

o Google was less than a year old (launch in September of 1988)

o Amazon had been in the market for 5 years and reported 14 million active users

o The Euro currency was launched

o President Clinton sex scandal

o Russian President Boris Yeltsin resigns and appoints Vladimir Putin as successor

• 2008:

o Twitter had been out for 2 years and boasted 5 million users by 2008

o Facebook was founded in 2004 and by 2008 had 100 million users

o Gold prices reach $1,000 an ounce for the first time

o Goldman Sachs and Morgan Stanley, become bank holding companies as a result of the subprime mortgage crisis.

o Lehman Brothers and Washington Mutual declare bankruptcy

o President George W. Bush signs a $700 billion bailout bill for the US financial system

• 2011

o The “Arab Spring” begins in Tunisia and spreads to Egypt and other countries

o A 9.0 magnitude earthquake strikes Japan, triggering a Tsunami that caused largest nuclear power plant accident in history

o Unemployment in the US reaches 9%

o Portugal officially falls into a recession, with economy contracting 0.6% for two consecutive quarters

o Tim Cook is appointed as CEO of Apple given Steve Job’s illness

o Twitter reports 117 million active users, Facebook 845 million, Amazon 164 million

• 2015

o Swiss National Bank ended its fix rate policy for the Swiss Franc, causing a turmoil in the currency markets

o Oil began its down turn and estimates had pointed to a $75 per barrel for end of year, after surpassing the $111 per barrel in 2012. Currently its hovering $40 per barrel

o Down Jones has worst one day loss since August 2011, shedding at one point 1,000 points but ending the trading day with 588 point loss

o China devalues its currency, signaling trouble for its economy

o Facebook reports 1.49 billion active accounts, Twitter 304 million and Amazon is competing with Walmart as top grocery shopping company

o The first Republican Presidential Candidate debate took place, and Facebook was center stage

o Uber, launched in 2009  as “everyone’s private drive” car app, reports a company value of over $50 billion

o Elon Musk continues to revolutionize the auto industry with new Tesla Motors models

 

Perhaps a notable difference between past and current conditions has to do with the rapid increase in the use of Social Media as a means of communication, were events are learned instantaneously by a vast majority. And just as in the case of the “Hubbert peak theory”, Ingenuity, Entrepreneurialship and Resourcefulness is today more predominant than ever, thrusting our economy into new and exciting territories that will certainly provide prosperous grounds for investors worldwide.

 

Truly any comparison with events that occurred in the past, most likely have no parallel with what is happening in 2015 and what will occur in the years to come. However one matter is constant throughout time, stock markets always find their way back to a positive path.

 

Andrew H. Jacobus

SEC Independent Registered Investment Adviser

 

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