Markets Today Have Much in Common With 2007

At first glance, the burst of volatility in 2018 is difficult to square with propitious micro and macro fundamentals. The backdrop is one of steady economic growth; strong corporate earnings; and low rates of unemployment, inflation and default. None of these is a departure from 2017, a year when the S&P 500 Index experienced the lowest level of realized volatility in more than 50 years. Why, then, were the daily swings in the index during the first quarter more than three times what they were during the fourth quarter?

Ten years after the financial crisis, there are important insights to be gained by studying the behavior of asset prices before 2008. It was in 2007 that cracks in the edifice of risk-taking began to emerge, even as the backdrop of economic and corporate fundamentals remained optically healthy. In April 2007, U.S. Treasury Secretary Hank Paulson said, “All the signs I look at show the housing market is at or near the bottom. The U.S. economy is very healthy and robust.” In June of 2007, Federal Reserve Chairman Ben S. Bernanke said, “Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008.”