It's Different This Time - Yes, Really

The stock market has not been a fun place to be since 4/23/10, and with 2008 still looming so large in our memories, we have to wonder whether we're again heading for something really ugly. At present, I don't think that's in the cards.

Differences

For normal people, the ultimate obscenity is known as a " four-letter word." For investors, the ultimate obscenity may be a four-word sentence: "It's different this time."

That underscores the trepidation I feel as I point out some important differences between now and late 2008.

For starters, the current downturn did not begin at anything even remotely resembling a peak price level, as we can see from Figure 1, a Yahoo! Finance S&P 500 price chart.

Figure 1

Actually, considering the vigor and persistence of the bounce of the early-2009 bottom, it's easy to argue that the market was due for a rest and would have found a reason, any reason, had Greece, Spain, et. al. not served one up so readily in the spring to start the ball rolling.

Stateside, there's a huge difference in expectations. Before the 2008 meltdown, many still though sub-prime lending and the accompanying approach to derivatives was a good thing. Now, we know better, much better. Going into 2007-2008, the financial system still had a lot of junk that needed to be cleaned up. It may not be pristine now, but it seems plausible to argue that we're a heck of lot cleaner than we were back then.

Finally, there's the nature of the stock selling itself. What happened in 2008 was not an ordinary bear market, or even a severe bear market. It was a completely different animal.

Figure 2 shows the number of S&P 500 stocks which fell 5% or more in one week at various points in time.

Figure 2

It's pretty bad so see how often a large number of blue-chip stocks fell so much so quickly, and it's interesting to note that we've been seeing some of that in the very recent past. Let's use that to get a general feel for how market weakness plays out in the real world.

Next, look at Figure 3, which raises the ante by charting the number of S&P 500 stocks that fell more than 10% in a week.

Figure 3

Now, we're starting to see some distinctions. The 2008 melt-down was different from most other bad periods in recent memory. The only other thing that came close was the post 9/11 selloff.

Finally consider Figure 4, which shows the number of S&P stocks falling more than 15% in a week.

Figure 4

Imagine a 15%-or-more stock price decline in one week. It's by no means unprecedented. We've seen situations like that when bad news comes out, often something very disappointing on the earnings front. But such events are usually scattered occurrences.

Imagine more than 300 simultaneous such situations within the S&P 500, the blue chips, the supposedly safest and most respectable part of the market!

That's powerful. That's also rare, enough so to even exceed the post-9/11 market drop. Making matters worse was the backdrop. Aside from the 2008 peak, unusually high levels continued to occur for several months.

Now, it's clear that late-2008 was a very special situation and that what we've been experiencing so far this spring has no resemblance at all to it (despite, even, the now-infamous flash crash).

It's definitely been rough out there. Figure 2 makes that clear, and so, to a lesser extent, does Figure 3. But we're not experiencing anything like the widespread and largely indiscriminate equity-dumping that occurred in late 2008.

Even so, we can't be complacent. Look again at Figure 3. We had nearly a year of persistently bad readings before the bottom fell eventually out of the market. We can even see a bit of that in Figure 4. Similarly high readings, albeit not as spectacularly high as late-'08, marked much of the early-decade bear market as well.

The most recent (spring of 2010) many-big-declines readings we see in Figures 3 and 4 are not cause for panic. But the trend bears watching. If it doesn't recede soon, we will want to fasten our seatbelts.