The overnight drama in Russia, against the backdrop of a steep drop in oil prices and unrest in emerging economies, has many traders concerned that history may be repeating itself: Back in 1997-98, what started as the "Asian Flu" morphed into a global credit crises in 1998 after Russia's debt default triggered the unraveling of Long Term Capital Management and a Fed-induced bailout of its Wall Street creditors.
Arguably, the 1998 drama and the Fed's response created a "moral hazard" and set the stage for the credit bubble of the early 2000s. Undoubtedly, the 1998 turmoil rattled investor confidence as the Dow fell 20% from its peak in early May to its nadir in early September that year. (For a full account of the 1998 saga, read Roger Lowenstein's seminal account: When Genius Failed).
Related: Russia in chaos! Ghost of '98 crash haunting stocks
Liz Ann Sonders, chief investment strategist at Charles Schwab, sees the parallels to 1998, but is pushing back against the chatter that it's necessarily all bad.
"Much like in the mid-to-late 1990s, there's a lot that could go on overseas that isn't necessarily going to topple the US economy," she says. "I think we're in pretty good shape."
Indeed, the strength of the U.S. economy has been somewhat lost in the shuffle of the market's recent volatility and overseas upheaval. A few salient points:
GDP growth in the second and third quarters represents the strongest six months since 2003.
The economy has created over 200,000 jobs for 10 straight months, the longest streak since 1995; November's payroll growth was the highest since January 2012.
At 5.8% in November, the unemployment rate matched its lowest level since 2008.
November auto sales were the best since 2003.
After rising 1.1% in November, U.S. factory output is now above its pre-recession peak from Dec. 2007.
"The 1998 default didn't have much of an impact on the U.S. economy," Sonders says. Then, as now, "the decline in oil prices was happening during an expansion...which is very different then then when you're in recessionary conditions which is causing a decline in energy prices."
That last point is debatable - many argue energy prices are declining because the global economy is in recession -- but it's hard to argue that the U.S. economy is growing and inflationary pressures are subdued, meaning the Federal Reserve doesn't feel pressure to raise rates. In the late 1990s, we called that "Goldilocks," a term that hasn't been heard much lately but might justifiably make a comeback if Sonders is right.
"We did have a pretty nasty correction [in 1998] but it was in the context of a secular bull market that continued for a few more years," says Sonders, who is "optimistic the bull market will continue" in 2015, as discussed in detail in part two of this interview. In the accompanying video, Sonders does note how quickly sentiment swings from euphoria to panic these days, which helps put a floor under stocks as seems to be the case Tuesday morning. After falling nearly 100 points at the open, the Dow surged back into positive territory and was recently up more than 200 points.
Finally, while many are concerned about the banking sector's exposure to energy companies -- as of Dec. 4, lending to oil and gas companies was at $465 billion in 2014, up 29% from the prior record in 2007, according to Thomson Reuters -- Sonders believes "the contagion will be somewhat limited this time because leverage in global financial system is down quite a bit."
Related: Oil & The Black Swan
The banks' exposure to the energy sector is "a fraction" of the exposure to the mortgage market in 2006-07," Sonders says. "There's no comparison."
But there is a comparison to 1998 unfolding -- it just might be a lot better than you think.
Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.
