Investors are apprehensive as markets have retreated over 29% in a matter of weeks. The prospect of a massive blow to the global economy from COVID-19 has led to a period of high volatility and downward momentum. For the curious, it’s a natural question to ask: how does this downturn compare to other periods of stress that we have seen throughout recent history? Specifically ask how this compares to the Great Recession, 2001 or even 1987.
The truth is this is not 2008. What we are experiencing is an acute shock, rather than a severe recession triggered by significant structural failures in the economy. Entering this period, the U.S. economy appeared on solid footing. We stated in our 2020 outlook that “despite the cautiously positive outlook, 2020 will likely be a turbulent year. Although the consumer remains strong, existential events could result in decreased consumer and business sentiment, causing an earlier than expected slowdown.” At that time, the existential threat was not a known threat, but rather the recognition that unknown threats to the economy exist. Unfortunately, the existential event which we mentioned is here and it arrives in the form of a pervasive virus that has spread throughout the globe.
What we saw in 2008 was the result of years of poor lending practices, high levels of leverage and speculative investing that caused a contagion effect which rippled throughout the world’s economy. The excess that we saw in the economy was so extensive that the impending downturn took over a year and a half to work itself through the system. What we are seeing now is an acute shock which is more appropriately comparable to markets in 2001 or even in the 1987 market crash.
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