While investors will reluctantly talk about the nightmare of losses caused by global equity market shocks in 2008, 2000 or 1987, less well-remembered is the sharp and sudden sell off of February 1994, the so-called bond market “massacre”.
However, Chris Wyllie, chief investment officer at Iveagh, is one to draw parallels with what happened 20 years ago.
He explains: “Everyone thought it was going to be a great year, and why shouldn’t it be? We were just getting going in terms of a recovery and a good year in equities, and trends were positive. And then it turned out to be very rocky caused by problems in the bond markets.”
Punchbowl politics
Certainly the Fed is as commanding today as it was two decades ago, perhaps even more so. Back then, like today, we were two years into an economic recovery with big stock market gains under the belt before the central bank “suddenly took the punchbowl away” with an initiative to raise interest rates.
“It meant blood on the streets for bond investors, but equities fared poorly too, initially correcting 10% over two months and confounding expectations of another good year by finishing 1994 lower than they started,” remembers Wyllie.
So could history repeat itself? There may be similarities, however there are suggestions that the Fed has since learnt from its mistakes.
In 1994, the Fed caught the markets off guard, and its actions were dictated by incipient signs of inflationary pressures, particularly in commodity markets. This time, however, Wyllie says the Fed has “bent over backwards to telegraph its next policy steps” and has continued to promise very easy monetary conditions overall.
History rhymes
He adds: “Commodity prices are weak and inflation low – some would say too low for comfort. Therefore none of the key conditions which existed in 1994 are present now. However, sometimes history doesn’t repeat, but it does rhyme.
“The lesson of 1994 was really that shocks often come out of a clear blue sky. Our indicators suggest that 2014 should be another decent one for investors; but we will keep something in reserve, just in case.”
