Over the past two months, I have repeatedly been asked the question of whether the current pandemic, and associated economic landscape, is 2008 all over again. It’s an obvious starting point to try to wrap our minds around what is a truly unthinkable situation. In times of crisis, we tend to look at other similar events as a first response, and there is good reason for this: we want to know how bad it is. We want to know when it will get better. We want to know how the strong survived. We want to shorten our learning curve so we can get on with the solution. But in times of crisis, war, or severe unknowns, we also have to get used to the idea that this time is unique and we are going to be making some of this up as we go.
The conditions for 2008 and 2020 are, in fact, quite different, with the former being a structural financial crisis that caused an “everywhere problem,” and the latter being an event-driven everywhere problem that is causing a financial crisis. Both scenarios result in a recession here at home and around the world, and are riddled with unknowns as we traipse through the crisis itself.
The 2008 crisis was a direct result of a financial system that failed on many levels. The national push for home ownership and a lack of mortgage oversight created a perfect storm for the housing market to collapse. Banks were not in good shape at that time, and the crisis caused waves of bank failures well into 2010. These financial problems spawned a contagion of problems elsewhere, and consumers felt like they lost money everywhere (their jobs, in the stock market, in the value of their homes). The effect of consumers not spending and businesses not being able to borrow enough slowed our rebound, and even state and local governments cut jobs through 2012.
The 2020 crisis is a direct result of just one thing: an unbelievably contagious virus. During a January call with a client, I remember saying, “This looks to be a pretty normal year in the markets,” and hoping I wasn’t jinxing myself. The backdrop to that call is important to recall. Banks were in great shape, and were well-capitalized. Corporations were not over-leveraged. The personal savings rate had increased to 8%. Employment was rock solid, at historically low levels. Investors of all stripes – from Mom and Pop to institutional investors and private equity managers – had cash on the sidelines. The housing market was (and still is) strong. The economy was not soaring but was steady. It looked to be a pretty normal year in the markets.
We knew in 2008 what was really bad – the housing market, the bad loans that had been made, the layoffs that would cause unemployment to skyrocket – but we had no idea how long it would last. This time we don’t know how bad things will get (since we know so little about the true nature of the virus) but we do know that there will be a timeframe, currently projected at 12-18 months. This wildcard nature of the virus is what makes this crisis both intriguing and vexing for scenario planners like me.
Even the idea that the virus can be stopped – presumably by a vaccine – allows all of us to do some mental planning around how bad this can get, and how quickly we will be “back to normal.” Hence the current heyday for furloughs as opposed to layoffs. Companies need to shut down expenses quickly, but will also need to ramp up as quickly as possible once they are allowed to do so per government regulations. Furloughed employees are still employees, and can be redeployed rapidly since they are trained and experienced. In previous recessions, companies did not have hope that the economy would improve quickly enough to need to keep workers tethered in place, so layoffs were a better option.
We have some additional layers of complexity this time. Consumers are choosing not to spend for two reasons: they don’t want to, or they can’t. They may be conserving cash, but they may also be scared to physically do what is required of them to spend money. Just consult the debates raging on social media about the occupancy level of restaurants, the safety of gyms, the necessity of a face mask in an elevator, for an understanding of the economic influences that the Fed and Congress can’t control this time.
As a backdrop, the 33% S&P 500 correction we saw from February 19 to March 23, 2020, occurred in 33 days. While the 2008 peak to trough was a 55% drop in the S&P 500, it took 517 days to occur. By December, 2008, 11.1M jobs had been lost, resulting in an unemployment rate of 7.2%. In contrast, the unemployment rate hit 14.7% in April, with a stunning loss of 20.5M jobs, according to the US Bureau of Labor Statistics. All of that upended the landscape for businesses and investors. These additional layers of complexity and intensity tell us that 2008 cannot provide an exhaustive catalogue of solutions for our current crisis.
In response to the ensuing damage, Fed chair Jerome Powell implemented the Fed’s 2008 playbook in very short order in March, slashing interest rates to zero, reinforcing the credit market, and guaranteeing liquidity for the economy. That playbook, it turns out, will serve simply as the foundation for what will ultimately be the totality of the strategies the Fed uses to backstop the economy in 2020, which the history books are sure to consider extraordinary.
Congress followed suit with quick action. While the 2008 stimulus package took 80 weeks to release, the 2020 package only took 11 weeks, and included a special designated pile of money to help small businesses pay their rent, their employees, and other expenses. The ‘last page’ of the 2008 Congressional playbook – essentially “target the pain points with large amounts of cash” – was the first page of the 2020 playbook, which saw Congress pass three bills in March, with more already under discussion.
So, where exactly does that leave us?
The “shape” of the economic recovery is a topic of hot debate. Some economists are still planning for a V-shaped recovery: swift down, swift up. That is hard to believe given the number of small businesses that may go out of business. However, the government’s goal is to keep people and businesses solvent and functioning so we can kick start the economy rapidly when the time is right. We should, therefore, expect more massive stimulus packages designed to bridge the economy to a time that coronavirus doesn’t change our spending habits.
With different approaches being used around the world, and even throughout our country, we should expect varying degrees of efficacy and varying timelines for the coronavirus to no longer be a concern. On the spectrum of worst to best outcomes, the worst outcome is clearly that we are unsuccessful in controlling the virus, we experience high levels of death, and that we cause great economic damage. In the collective attempts to avoid that outcome, many parts of our lives will change. We are still in the beginning of this crisis and the imprint it will leave on the world, but it is obvious that the rules of yesterday simply may seem absurd in our future.
Predictions will abound during this time, and will be preached like facts. Sensationalism, extremes, and negativity draw more attention, but don’t allow room for the natural ebb and flow of cycles. In 2008, wild predictions were made about things that were “obviously” going to come to be. One such prediction, that oil would go to $300 per barrel, didn’t even come close. In times of crisis, we want to believe expert predictions because, well, they’re from experts, and therefore should help us to make order out of chaos. But they can, in and of themselves, create more chaos if we don’t counterbalance them with an understanding of the cyclical nature of humanity, economies, and trends.
We are going to get out of this crisis, even if it’s not exactly “back to normal.” In 2008, banks, the Fed, and the government were responsible for fixing things. This time, it’s on us. We are going to have to get ourselves out of this. We, as consumers. We, as business owners. We, as community leaders. We, as family members. We can all feel by now that there is pent up economic activity, from hair to cut, to clothes to buy, and adventures to take. We will need to decide how to balance our personal safety with the level of economic activity we want to have in our lives, knowing that one day we will know how the strong survived.
Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.