World stock markets climbed 11% from their August low to the recent peak on 12th October (as measured by the MSCI World index in local currency terms). Momentum and sentiment measures were at overbought levels at the start of last week and equities were ripe for a correction, for which surging oil prices provided fundamental justification.

Some analysts claim there is a four-year cycle in global stock markets, perhaps related to US presidential elections. If so, an examination of market behaviour four, eight, 12 etc. years ago may provide some clues to the future. Much attention is currently being given to the twentieth anniversary of the October 1987 crash but market movements so far this year show little resemblance to 1987 and fundamental conditions also look very different. The MSCI World index rose 32% from its 31st December level before the 1987 decline started; the maximum gain this year has been 10%. The 1987 crash occurred at a time of tightening global monetary conditions when equities were significantly overvalued relative to bonds; neither is true today. The only significant similarity is the weakness of the US dollar.

In terms of the four-year cycle, the closest fit to the present is probably 1999. The chart shows the behaviour of the FTSE 100 index this year compared with 1999; similar results are obtained using other global indices. In both years stocks peaked around mid year, fell sharply into August and recovered into early October. In 1999 a subsequent lurch down took the FTSE 100 index below its prior low, after which it rallied to new highs. The decline this October has been less pronounced (so far) and the index remains well above its summer trough. The comparison suggests a low may be close in terms of time though not necessarily price.

Like 2007, 1999 was the third year of a second term presidency. Global growth was solid at mid year and monetary conditions looked benign, as they do currently. The setback in equities mainly reflected worries about computer disruption associated with the Y2K date changeover. It seems strange in retrospect but most economists expected a significant negative impact, with some even forecasting recession. There is arguably a similarity with current uncertainty about the economic effects of credit and money market dislocation.

I am still hopeful of further upside for equities beyond the current bout of weakness but such a scenario is likely to depend on a retreat in oil prices.