Differentiating 2008 vs 2020

Robert Ramos |

Since late 2008, we have attempted to explain how different the Great Recession was from every other recession of our
lifetimes. The Coronavirus shock we are currently living through unfortunately helps tell this story.

In the run up to 2008, US consumers massively overspent on homes and in general had entirely too much debt. Banks
and non-bank lending institutions loaned out entirely too much money relative to the reserves they had on hand. The US
economy was on very shaky ground.

The coronavirus initially gave the system a supply shock. Shuttered factories in China reduced supplies to manufacturers
all over the world. The spread of the disease is now leading to a demand shock as government shuts down large portions
of their economy. Prior to the event the US economy was performing near what is considered its natural rate of growth--
-not too hot…not too cold. Employment was high and inflation was low. The US economy was muddling along but sound.
Coming into the events, the two scenarios were very different. The recession that began in late 2007 began on its own. If
the National Bureau of Economic Research does confirm that a US recession occurred in 2020, it will be a recession
created by the government.

We can’t compare the depths of the contractions as the current event is still playing itself out. We can make reasonable
comparisons about the length of and recovery from the recessions using past history.

As we all remember, the Great Recession was awful. The economy and markets were in freefall. Trying to figure out
what was happening and how long it would last was like trying to find our way out of the forest at night in a dense fog.
The Great Recession lasted from December 2007 thru June 2009 (NBER). US stock markets bottomed in March, three
months earlier than the bottom in the economy. This was not an anomaly. Historically, stock markets tend to bottom
before the economy does. Keep that in mind.

We can already see the events that will end this potential recession and the bottom of the stock markets. Those events
are the slowing of the infection rate and state/local governments allowing hospitality businesses to reopen.

The recoveries from the events are likely to be as different as the events themselves. This is important to understand.

After the Great Recession, the financial position of the American household was in shambles. Foreclosures were
rampant. Credit card debt was too high. American got themselves in over their heads. As such, there was no pent up
demand. When a more “normal” business cycle type of recession occurs, consumers begin spending more freely as their
outlook on the economy improves. In 2009, Americans didn’t have money to spend. They had to pay down debts. It was
well known that it was going to take a long time to recover from the Great Recession because American households
were in such bad financial shape.

Today, it is different. US consumers still spend more than they should. However, the lessons of 2007-2009 have not
completed faded from our memories. People have a higher propensity to save. LOTS of people were employed. Debt
levels for families are not out of control like they were prior to 2007. Also, remember the general economy was
performing adequately well coming into this mess.

When this period of economic instability ends, consumers will have the “dry powder” to put to work. There will be “pent
up demand”. If fact, “pent up demand” will be quite literal. Each of us will demand to go out to eat because we’ve been
pent up inside our homes with our families for so long. The expectations for after this event ends may be like when the
snow thaws and the roads are cleared after a major snowstorm.

There is one other historical consistency that we would like to point out: short term investment market activity is driven
by fear and greed. As such, over the short term investment markets have an inherent tendency to overshoot. They go
too high and they go too low in response to economic conditions.

There have been 8 recessions and 8 bear markets in this country since 1960. The US economy did not end, nor did the
stock markets go to zero in any of those previous events. Each of those periods were nerve wracking just as this period
is. However, the best opportunities are also presented to us during times like these. Because markets have that
tendency to overshoot to the downside, those who hold or add to their investments during times like these have been
well rewarded historically. Investors with well diversified portfolios, as you all are, should look through this instability
towards the recovery and renewed economic expansion.

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