NO, THIS ISN’T 2008: PERSPECTIVE ON THE CORONAVIRUS ECONOMY
JIM CAHN Chief Investment Officer
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 Federal Reserve evince a focus on avoiding the mistakes of 2008. The Fed’s surprise interest rate cut and commitment to $700 billion 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, etc.
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 U.S. 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.
THE PANDEMIC PLAYBOOK | 2020
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