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WITH A PROPOSED BAILOUT PACKAGE FOR A FRAGILE financial system jeopardized by politically vulnerable legislators and outraged citizens, the U.S. stock market succumbs to vicious selling pressure, and the decline becoming a disorderly cascade, before the Standard & Poor's 500 Index finally settles near the 1100 level.
That was Sept. 29, 2008, the month of the Lehman Brothers collapse and the day that Congress failed to pass the Troubled Asset Relief Program on the first try, sending the Dow industrials down 777 points and causing the S&P 500 to drop more than 100 points, to 1106. This also, roughly, describes the latter part of last week, when a foot-dragging German parliament and an agitated Athens street crowd dragged a wrongfooted U.S. stock market to within a few points of where it finished that day in 2008.
This is far from the first place it's been noted that we're experiencing something of a 2008 moment, with overindebted governments replacing overleveraged banks in the market argument over "Can they make it through?" and "Who's next?"
Synchronously, the CBOE Volatility Index (VIX), the (overly popular) measure of trader demand for downside equity protection, closed above 40 Friday for the first time since April 2009. In September 2008, the VIX crossed 40 for the first time in that crisis -- only to stay above this once-rare level for months, as the deepening crisis broke most rules of thumb, set new standards for market stress and sent birds flying upside down.
Of course, it's important to note the crucial differences. Governments, unlike investment banks, don't finance themselves with overnight paper, don't operate at the whim of the market, and can't be put into predawn receivership and forcibly be merged into JPMorgan Chase.
Most obviously, the 2008 episode represented an acceleration of an existing market downtrend into a deepening recession, with policy makers racing to fashion responses to system failure. Today, the market is declining from an overbought condition after an 80% advance, thanks in large part to the aggressive policy responses that grew from the '08 madness.
Importantly, measures of interbank lending and general credit conditions, while they've faltered a bit in recent weeks, currently are well within the normal zone, whereas the last time the S&P rushed to 1100 on the way down, those markets were in severe distress. The worst of the economic shocks were ahead of the market back then, whereas now domestic fundamentals are solidly improving, as the first quarter's corporate-earnings season and Friday's better-than-projected payroll release affirm.
On the other hand, it's probably not a coincidence that the Greek debt drama couldn't be shaken off this time around, because it coincided with a rolling over of many global leading economic indicators, an effort by China to constrain lending, the local Chinese stock market hitting a six-month low, and copper prices running well below their March peak.
When the S&P dropped to 1100 that ugly day in the fall of 2008, on the way to below 700 in the ultimate panic early last year, it was trading at 12 times then-forecast earnings for the forward 12-month period. Today, we are at 14 times current year-ahead projected earnings. But, of course, a year-and-a-half ago, profit expectations were entering free-fall mode, while now they're still rising, to the point where analysts collectively are looking at 2011 earnings for S&P 500 companies above $95.
This seems giddily high to some, of course, but isn't all that crazy, given that today's S&P 500 constituents earned $86 in 2007, nominal U.S. gross domestic product is running at record levels, and global GDP is trillions of dollars higher today than it was three years ago.
It could certainly be that a run back up to just above 1200 on the S&P 500 -- a level reached last month, and one that's been flagged here as having a postcrisis gravitational pull since last summer -- is all the market owed the bulls, for now.
While the current 8.7% pullback from the highs is slightly deeper than the one that started in January, this one began with far more investor optimism needing to be wrung out of the market. And as long as the market shows no ability to refocus away from the global macro picture, stocks could struggle to catch a bid for a while.
But unless a nasty sovereign-debt contagion is loosed and squelches the recovery story all together, it's likelier that this episode will eventually be viewed as a time when a crisis-scarred investing community feared a greater blow than was actually on the way.
E-mail: michael.santoli@barrons.com
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