Merrill Lynch's David Rosenberg answers the question we were dying to know the answer to: What happened to the markets after the last huge government bailout--the RTC thrift deal in 1989?
Answer?
Depends which market you're talking about. But unless you mean the bond market, which soared, the answer is "they kept going down."
Specifically, the stock market dropped for another year, the economy dropped for two years, and the housing market dropped for three years. So put the cork back in that champagne. Rosenberg:
The elusive bottom: Keep in mind, for all the bottom pickers out there, that after the RTC was
established in 1989 it took a year for the stock market to bottom, two years for the
economy to bottom, and three years for the housing market to bottom. And recall
that after the FSA in Japan was unveiled in 1997 the stock market didn’t bottom
for another five years and it’s an open question as whether the economy ever did
manage to stage a sustainable recovery. In the Swedish case of the early 1990s,
even with an effective government solution, the process of extinguishing the bad
debts via government intervention was painful – the equity market incurred a
28-month long bear market that saw Sweden’s major index decline 45% from
peak to trough and the economy undergo a 20-month recession that saw
domestic demand contract by 2-1/2%.
Prefer pictures to words? Here are some from David's most recent note.
Stock Market: Here's the S&P 500 from the late-80s to the early-90s. That little red dot is the RTC bailout deal:
Economy: Here's GDP. Again, that dot is the bailout.
Unemployment: Did the bailout put people right back to work? Not exactly.
Housing: Given that the RTC cleaned up the S&L mess, you might think housing bounced back right away. Nope.
The good news is that David notes that bonds were a great buy shortly after the RTC deal. He thinks the same thing will happen this time around:
Initial [bond] selloff turned into great buying opportunity. bond yields backed up initially as investors focused on the potential for a substantial increase in the supply of Treasuries. Yet, while the yield on the 10-year note yield backed up around 100 basis points (50 basis points in today’s terms) in response to the uncertain fiscal outlook at the time, the reality is that this selloff turned into one of the greatest buying opportunities in the past two decades. By the time the prolonged period of sub-par economic growth ended in late 1993, the 10-year note yield rallied more than 300 basis points from the post-RTC highs. bond yields backed up initially as investors focused on the potential for a substantial increase in the supply of Treasuries. Yet, while the yield on the 10-year note yield backed up around 100 basis points (50 basis points in today’s terms) in response to the uncertain fiscal outlook at the time, the reality is that this selloff turned into one of the greatest buying opportunities in the past two decades. By the time the prolonged period of sub-par economic growth ended in late 1993, the 10-year note yield rallied more than 300 basis points from the post-RTC highs.
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