Are There Similarities Between 2008 and 2020?
I was nosey . . . First a Chart. more charts and then the verbiage . . . Thanks to Strategic Exit for giving me a foundation.
There are more informational stats at YouGov Survey: “Political Violence and Extremism.” I was curious, YouGov depicts themselves as an international online research data and analytics technology group. “Our mission is to offer unparalleled insight into what the world thinks.”
I was looking for an article I could tie to this chart. Mostly because I believe there are similarities between 2008 and 2020. There is such. What is different between the two economic crisis’s is how the government reacted. Strategic Exit has the simplest and a short explanation which makes for an easy read, “2020 is NOT the Same as the 2008 Downturn.” What I would call a brief was written December 2020.
Of course, the approach is to look at three different avenues. in comparing 2008 to 2020 and deciding the later event is not the same as the former. This is exactly what I was looking for in an article.
– Systematic Problem vs. Black Swan Event
The differences between 2008 and 2020 begins with their origins. 2008 was a systematic financial crisis: subprime mortgages, unstable institutions, and high levels of consumer credit accumulated for over a decade without notice. These unsustainable systematic imbalances triggered a market collapse beginning in the U.S. reverberating throughout the world. In other words, 2008 exposed “very correctable” fundamental flaws in the economic and financial systems that would take years to correct.
The more recent downturn was a black swan event and both unpredictable and impactful. Unlike the Great Recession, 2020 conditions stem from a health crisis. The shutdown triggered by the COVID-19 pandemic has had a relatively small effect on banks. In 2020 Goldman Sachs beat analyst earnings estimates by $3.5B. The repercussions from 2008 forced many institutions to better equip their balance sheets for future downturns, mitigating problems within our financial systems. Therefore, due to 2020’s lack of systematic issues and unexpected nature, it was predicted the U.S. would experience a quicker economic recovery than expected in 2008. (AB) I agree such is true.
– Gradual Reaction vs. Immediate Response
Speed in reacting to the crisis is another factor to which there is a difference.
The Great Recession officially began at the end of 2007, TARP (The Troubled Asset and Relief Program) was not passed until October 3, 2008. On March 27, 2020, the CARES Act was signed into law. This was only a few weeks after the virus began to take its toll on the U.S. economy. The speed of government response to this downturn is an important factor in shielding the economy from short-term impacts of the pandemic, though long-term effects are still up for debate.
Comparing the 2008 and 2020 stock markets, similar patterns emerge. In 2008, the stock market lost 40% off its peak through the course of one year and did not fully recover until 4 years later. In 2020, the S&P500 fell by 34% between February 19th and March 23rd. It was the fastest fall into a bear market in US history. Shortly thereafter, it began to grow again and has almost caught up to pre-pandemic levels. The subsequent growth is a good indicator of investor confidence for the future of our economy, signifying a quicker return to normal. Many companies have prepared and are to taking advantage of the post-pandemic M&A market.
– Debt vs. Liquidity
Near the end of the 2008 recession, a mergers and acquisitions window opened. During which time, a few companies were prepared plus liquid enough and risk tolerant to make strategic purchases helping them outperform those who did not.
In 2020, investors were much more stable, prepared, and liquid. Cash on corporate balance sheets was at $2.4 trillion. Interest rates were near zero and corporate tax rates are at 21% (the lowest they have been since the 1930s). Additionally, price and earnings dry powder (a strong indication of investor sentiment) was at its highest ever: $2.5 trillion.
Whereas 2008 saw PE activity drop off by 72%, PE deal volume only dropped by 36% in 2020 and was already growing again. These differences revealed a market gearing up for acquisitions upon signs of recovery.
An abundance of liquidity, quick external responses, and non-systemic root supported the 2020 downturn which was different than 2008.
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Were we more prepared to act in 2020 as compared to 2008. I would say yes. Obama took over the presidency in 2009. It was a bit late to start correcting some of the issues brought about by Wall Street gambling. The let alone Fed Chair Greenspan was replaced by Ben Bernanke. When the 2008 recession started Bernanke’s reaction was similar in flooding the economy with money for which he is criticized. Sound familiar?
“Critics argue that Ben Bernanke flooded the economy with too much money, contributing to inflation and increased debt.”
The difference between 2008 and 2020 was the reaction of the government. The issue with the poll by YouGov Survey is it does not account for the news media reporting in 2020. What would 2020 been like if Biden did not take action? We get a partial view of what would happen in 2020 by what happened in 2008 due to slow reaction by Congress.
I would suggest much of the polling done in the original chart at the beginning is the result of what people are thinking.
Some additional reads:
– Insights and Updates | Strategic Exit Advisors
– Chart Book: Tracking the Post-Great Recession Economy | Center on Budget and Policy Priorities