|Forbes.com, Spring, 2020. This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
With the prospect of an economic downturn looking increasingly likely, the question arises, what will the downturn look like? For many of us, the financial collapse of 2008 is still fresh in our minds. But that’s just one data point. It’s worth remembering that most downturns have looked nothing like 2008, and there are few reasons to believe this one will.
2008 Represented Unique Circumstances
The post-2008 market decline and recession was driven by a collapse of the financial services sector. This constituted a double whammy. As the markets tanked, a liquidity crisis arose. People and business owners lost access to the credit necessary to keep their homes and businesses afloat. This resulted in a protracted recession. But after 2008, we enacted key reforms to enhance bank capital, greatly reducing probability of failure today.
The current equity market downturn is demand driven; businesses aren’t investing and consumers aren’t spending. Demand-led downturns tend to be shallower, and recover faster, than financially-led downturns. In contrast to 2008, banks will be in a place to lend and support growth as demand inevitably returns.
Fed Actions Bode Well
Actions by the Fed demonstrate a focus on avoiding the mistakes of 2008. The Fed’s surprise interest rate cut and commitment to $700B of bond buying alleviated building liquidity stress in the treasury and inter-bank markets. Again, unlike in 2008, credit will remain available to solid companies.
The path of the 2008 financial crisis was a mystery at the time. In this case, while we are certainly in uncharted waters from a global health policy standpoint, a crisis resulting from a virus and infectious disease is better understood than banking system networks, hedge funds, high frequency traders among other elements of the financial ecosystem.
A Recovery Roadmap Is Coming Together
As it pertains to the virus, we are starting to get a picture of what works. Looking at Asia (China, Taiwan, and Korea), we have seen the fruits of containment and social distancing. If the country follows increasingly strict containment procedures, which, per the administration, are likely to be lifted by July or August, peak infection appears likely to occur sometime in the next 30 or 60 days.
As it appears Americans are increasingly observant of recommended distancing measures, there is room for optimism. Pent up demand created by social distancing and improved supply channels would point to an earnings recovery in second half of 2020.
Of course, none of this is to downplay the volatility we are seeing now. Until the measurably effect of virus containment strategies are known, the next 30-60 days will be extremely difficult to predict, even if economic collapse is unlikely.
Don’t Time The Markets. Look To The Long Term.
For this reason, it is unwise to attempt to time the markets. We are likely to see abnormal market movements, many of which will be driven by headlines as much as underlying factors. When volatility is high, it tends to stay high. That applies to market highs as well as lows.
This isn’t to say you should not reposition your portfolio at all. Dips in the market often present buying opportunities.
And, of course, confounding factors have the potential to drive markets in either direction. An unexpectedly quick recovery or early arrival of a vaccine would obviously benefit markets. Saudi Arabia’s declaration of an oil war have shown how vulnerable to markets can be to external forces.
Still, from an economic standpoint, we are dealing with a devil we know. The lessons learned from 2008 will serve us well, and there are good reasons to believe that particular chapter of history will not repeat itself.