(Bloomberg Opinion) -- During the global stock market sell-off in early 2016, there were widespread fears of a 2008-style crisis. I wrote at the time that while systemic breakdowns are never out of the question, there was far less potential for mayhem because, unlike 2008, global stock prices appeared to have mostly digested the risks.
With renewed fears that the coronavirus will spark an economic shock echoing the global financial crisis without urgent action, as European Central Bank President Christine Lagarde warned late Tuesday, it’s worth pointing out again that this is not 2008.
What made 2008 so devastating for investors was not the financial crisis per se but that they had chased stock prices to excessive levels in the years leading up to the crisis, ignoring that exogenous shocks come along with surprising frequency to bring stock prices back to earth. There are few signs of that kind of frivolity today, particularly outside the U.S. in regions such as Europe, developed Asia and much of the developing world. In many of those places, investors haven’t stopped fretting since 2008.
My preferred gauge for stock valuations is the cyclically adjusted price-to-earnings, or CAPE, ratio because it accounts for both the growth of earnings and stock prices. Consider this: At the peak of the global stock market before the financial crisis in October 2007, the CAPE ratio for the MSCI World ex USA Index, a basket of stocks from 22 developed countries outside the U.S., was 26, according to Bloomberg data. Today that ratio is 16, or nearly 40% lower. The difference in emerging markets is even starker. The CAPE ratio for the MSCI Emerging Markets Index peaked at 29 before the financial crisis. Today it’s at 15, or nearly half as expensive.
The U.S. is a mixed bag, as some segments, such as growth stocks in the technology, communications and health-care sectors, have been hugely successful since the financial crisis. Not surprisingly, the CAPE ratio for the Russell 1000 Growth Index is more than 20% higher than it was before the crisis — 38 compared with 31 in October 2007. U.S. stocks, on the other hand, have mostly languished along with the rest of the world. The CAPE ratio for the Russell 1000 Value Index was 19 in October 2007. Today it’s 16, a haircut of roughly 15%.
Many investors, particularly those in the U.S., probably don’t need reminding. They’ve watched their foreign and stocks struggle to rise for more than a decade as numerous concerns along the way have prevented their rise. But here’s the flip side: If the coronavirus does spark a broader crisis, the predictable repricing of stocks now underway is likely to be far less severe than it was in 2008. The valuation of emerging-market stocks, for example, would need to contract by 22% to reach the financial crisis low. Granted, that’s no picnic, but it’s a far cry from the 58% contraction from peak to trough during the crisis.
The same is true, to a lesser degree, about U.S. stocks and those in developed countries outside the U.S. The notable exception is U.S. growth stocks. Their valuation would have to contract by 62% to reach the financial crisis low, or 8 percentage points more than their peak to trough contraction during the crisis.
Even so, looking at global stocks as a whole, investors are far more sober today than they were in the years leading up to the financial crisis, which also means there’s less room for disappointment.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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