Capital In Flight: A Financial Market Lesson From 2008

Maria Rinehart

This market is in flux.

The question on many traders’ minds is whether the trade wars will precipitate a deeper stock market correction than we otherwise would experience if we head into a recession in the coming months.

Stock Market Selling: 2008 versus 2019

Rather than attempt to predict the future, let’s look back to 2008 to see where capital will likely flow if the selling pressure continues.

We will compare capital flight out of the S&P 500 Index INDEXSP: .INX to long-term sovereign debt represented by the 20+ Year Treasury Bonds ETF NASDAQ: TLT. Then (2008) versus now (2019).

We will then compare US equities (S&P 500 – SPX) to Chinese equities (Shanghai Composite – SSEC) in 2008.

TLT 2008 (ChartTreker):

TLT Present (ChartTreker):

Compare US equities (SPX) to Chinese equities (SSEC) in 2008.

S&P 500 Index 2008 (ChartTreker):

Shanghai Composite SSEC 2008 (ChartTreker):             

The Story In The Charts

China (SSEC) and long term sovereign debt (TLT) are where capital fled from equities (SPX) in 2008.  Today, capital is fleeing China in response to the trade wars and is heading for safety in sovereign debt and other US assets.

For example, real estate has been a big winner in 2019. Notice that despite US equities bottoming at the beginning of the year following the correction last October, sovereign debt (TLT) simply formed a base. This was a warning that the underpinnings of the market were on less stable ground.

The TLT has been on a run again since April and has now jumped out of its channel.  Sharp moves outside an established channel tell the technical analyst to be careful, that the trade has entered “irrational exuberance” territory. Still the question is, where will capital go if the SPX continues to weaken?

From the charts, we see that in 2008, in addition to the TLT, capital also fled to China.  As we know, the TLT peaks well before the overall market bottoms (see 2012 and 2015).  In late 2008/early 2009, the TLT peaked and early money began to move into beaten down assets (oil, autos, and commodities) until the S&P finally bottomed in March 2009. 

Today, China is in trouble because of the trade wars, but oil and autos are near decade lows and commodities are already well under pressure.  These bear watching to see if they form new bases because as money eventually leaves sovereign debt, it will likely move into assets like these. The lesson from 2008 is that money will continue to flow into sovereign debt and eventually into other assets that lagged during the previous uptrend until the overall market finds a bottom.

Twitter:  @rinehartmaria

The author may have a position in mentioned securities at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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