CHAPEL HILL, N.C. — Turkey’s currency crisis is creating the preconditions for a good buying opportunity in the U.S. stock market.
That’s because the world’s central banks will almost certainly make sure that there is plenty of liquidity to keep Turkey’s crisis from spreading too far. And, inevitably, much of that liquidity will make its way into the equity markets.
Investors’ knee-jerk panic therefore gives contrarian-oriented investors the opportunity to purchase equities at cheaper prices. If the time to buy is when the blood is running in the streets, to quote the famous phrase from the Baron Rothschild, now could be just such a time.
Doubters among you should recall the equity markets’ reaction to an all-too-similar crisis that began in late 2009 in Turkey’s archrival Greece. Despite widespread doom and gloom forecasts that the nine-year-ago crisis would lead to the disintegration of the European Union—and, in turn, the unraveling of the world’s monetary system—the S&P 500 SPX, -0.09% today is several hundred percent higher.
Read: Strategists see 4 ways out of Turkey’s currency crisis
And it’s not just 20-20 hindsight for me to point this out now, with a strong bull market under our belts. On the contrary, in a series of columns beginning in March 2010, I regularly pointed out that the stock market usually takes currency and sovereign debt crises very much in stride.
I based my confidence on how the stock market had reacted previously to other such crises over the prior two decades. The crises on which I focused were the 1994 Mexican peso devaluation and associated crisis; the Thai government debt crisis 1997 (which led to the term “Asian contagion”); the 1998 Russian ruble devaluation in August 1998 (which led to the bankruptcy of Long-Term Capital Management), and the 2001 Argentine government debt/currency crisis.
The accompanying chart shows how the U.S. stock market—on average—reacted to these four crises. For both data series, 100 represents the stock market’s level when those crises first broke onto the world financial scene. Notice that equities’ reaction over the four years following the Greek crisis was remarkably close to the average of its behavior in the wake of the previous crises.
To be sure, there were a myriad idiosyncratic factors affecting the market’s reaction to each of these previous crises, as there always are. So we need to be careful to avoid overgeneralizing. But the common theme would appear to be the famous phrase from the late newsletter editor and fund manager Marty Zweig: “Don’t fight the Fed.”
Of course, the Fed and other major world central banks are neither omniscient nor omnipotent, so there is no 100% guarantee that they will always succeed in preventing a localized crisis from getting out of hand. But in any one single instance—like what the current Turkish crisis—the shrewd bet will always be that the Fed will figure out how to keep the system afloat.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com. Create an email alert for Mark Hulbert’s MarketWatch columns here (requires sign-in).
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