Finding a historical parallel for today's stock market

History tends to repeat itself, so it's perhaps no surprise that investors are constantly searching for patterns and historical parallels to guide them. Over at MarketWatch, Mark Hulbert points out that the current market environment might have two different historical parallels:

(1) The late 1970s. "Many of the newsletter editors I monitor see all the hallmarks of a 1970s-like stagflation just over the horizon. During the latter part of that decade the Federal Reserve inflated the U.S. economy to try to avoid a recession. But, far from robust economic growth, the result was anemic growth at best and soaring inflation. Gold bullion skyrocketed, while stocks on the whole proved disappointing..."

(2) Fall 1998. "For an historical analogy to today's market, [look] no further back to the fall of 1998, some nine years ago. That was when the global currency markets went haywire, stock markets melted down, especially in Asia (remember the term "Asian Contagion"?), and Long Term Capital Management went bankrupt and alerted the world, many for the first time, to the markets' vulnerability to the unwinding of hedge-fund leverage."

So which time period is the better example? It may be too early to say, but Hulbert suggests that 1998 is probably "the closest analog to today's stock market." If he's right, that would be good news for investors -- in 1998, the stock market responded positively to intervention by the Federal Reserve, with the S&P 500 surging more than 39% over the next 12 months.

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Article Source: TradeKing Blog