In this article, I’ll talk through both recessions, what makes them similar and different, and what we should be doing and thinking about as all of us move further into an economic downturn.
What happened in 2008?
In 2008, there was a dramatic downturn in the real estate industry. The primary cause was due to subprime lending impacting both funding markets and ultimately the bottom line of major banking institutions.
This led to a high degree of economic uncertainty and stress and threatened a global economic crisis. Obviously, the country wasn’t ready for this.
The downturn caused people to lose value in their homes and began the spiraling of a massive economic recession. Close to nine million jobs were lost during the Great Recession, and there was even a period of time during the winter of 2008 to 2009 where about 750,000 jobs were lost each month.
Needless to say, times were tough. If you recall, companies that were once at the top of their game, such as Chrysler and General Motors, filed for bankruptcy. Across the world, you saw the most significant reduction in global trade ever.
Thankfully, though, the recession didn’t last too long. There were policies put in place to intervene and help the economy not completely tank. There was about a 5% downturn in GDP during this time.
But by the second half of 2009, things started to trend upward. Still, though unemployment was an issue, as it hit 10% in the fall of 2009.
What’s happening in 2020?
This latest recession has been quite shocking. The markets have deteriorated so quickly, and it’s impacting the global economy at a pace no one has seen before.
Stocks across the board – both in domestic and global markets – have been pummeled. There have been blips of sectors of specific companies that have done okay, but for the most part, the markets are getting crushed.
Investors are keeping away from junk bonds in the credit market, also. And one of the things I find most abnormal is that US Treasurys are also taking a hit. These are typically regarded as the safest investments, and we often see an uptick in this market during a recession.
Having said that, lately, these equities have been pressured. The thought is that many investors are selling their Treasurys to cover other losses.
It’s impossible to say where this is going to go. But for a point of reference, here are far some of the other recessions fared:
- The Great Depression saw about an 89% decline in the market.
- Black Monday saw a 31% drop.
- The Great Recession from ~2007-2009 took about a 49% loss.
Despite what it may seem, there aren’t a lot of similarities between the two recessions (2008 and 2020), but there are two important ones I want to point out.
First of all, they are both economic recessions caused by something. Unlike Black Monday, which really wasn’t based on anything (and didn’t cause a recession), 2008 and 2020 both had a breaking point. In 2008, it was the burst of the debt bubble after years of subprime and predatory lending by big banks. This year, it’s the coronavirus.
Both recessions have also caused panic in, and a drop-in, our financial markets. As I stated above, the Great Recession experienced a market downturn of about 49% over the course of a year and a half. And, the Dow has already dropped 31% year to date. The Fed is cutting rates, stocks are tanking, and there’s a stimulus package. This all happened in 2008, too.
Beyond these two major similarities, though, the two recessions are quite different.
How are they different?
The Great Recession was about big banks
The Great Recession in 2008 really centered around large banks. This time around, though (especially considering consolidation of balance sheets), it’s unlikely that these banks are going to run into the same types of challenges.
That being said, fund managers on Wall Street are in a panic. They’re taking huge losses and looking at a massive demand for cash right now as the markets are tanking. And big industries like airlines, oil, and lodging are already seeing significantly lower prices, which could create a sort-of domino effect for other industries.
So this recession is a LOT different than in 2008.
The entire economy is shutting down this time
Unlike the last recession, the entire economy is at risk of being shut down this time around. People are staying indoors – either voluntarily or mandated – and spending less money. Nobody is traveling. Businesses are closing.
It’s truly unprecedented.
The scariest part is that because this hasn’t happened before in this way, the market doesn’t really know how to react – meaning things can fall even further.
A major concern, if you really think about it, is that this recession (and matching crash in the market) is related to something tangible.
Black Monday – which was a day in 1987 that held the biggest one-day drop in the market EVER – was just a blip. It was a minor market correction that didn’t cause a recession and we came out of that unscathed.
In 2008, we pretty much caused it ourselves through things like subprime lending as the debt bubble burst inside of our entire financial system. We were able to put a stopper in it and course-correct through stimulus packages and fiscal policies, though.
What we’re experiencing now, however, isn’t because of a market blip, a downfall of over-indexed “dot coms” (see, the early 2000s), or banks selling people awful loans they can’t afford.
This recession is based on something we know very little about – a virus that’s spreading like a wildfire.
Everyone is being affected one way or another
Everyone, from Wall Street fund managers to your average day-to-day investor, is coming to terms with the reality that it’s causing our economy to spiral out of control.
This week I saw an interview with someone who runs a multi-billion dollar real estate firm. He said that his company is hemorrhaging money right now because the one focus his business has – selling real estate – has dried up. People are way too nervous to let go of their money and are backing out of both buying and selling right now.
And COVID-19 has already spread too quickly to stop. So all we can do at this point is hope to slow the spread and flatten the curve.
What lessons were learned from 2008?
There’s a rally before the storm
In 2009, markets actually rallied about +33% over the course of the year before the Great Recession. We forget about this because we were busy enjoying the ride and thinking it would last forever. That only made the crash harder as things tanked from what felt like a euphoric rise in our portfolios.
While not quite the same rally, the markets were up a good 14% or so in the year prior to the coronavirus spread.
The lesson here is that good things don’t last forever, and we have to be as cautious with bull markets as we do bear markets.
Overall Gross Domestic Product, a key economic indicator, dropped by about 5% from the Great Recession. That’s a pretty significant drop.
To give you some perspective, the 2018 yearly growth showed some of the largest GDP growth seen in the past ten years, and that was about +2.9%.
So a 5% drop is massive.
While we don’t know the full impact of this recession yet, it’s safe to say that it’ll cause a drop in GDP. How big, we don’t know.
The market will rebound, eventually
While 2008 at the time seemed like a neverending crisis, it eventually began to get better toward the latter half of 2009 and ultimately started improving in 2010.
While I always remind myself that past performance is not an indicator of future performance, it’s at the very least a data point. And historically, there have been plenty of ebbs and flows.
Heck, in this article alone I’ve talked about four different recessions. And we’re all still here.
The point I’m making is that the market is going to rebound eventually. It might take a lot longer than before, or it might be faster – we don’t know. But with as much data as we have, nothing indicates that this is the end of our financial markets as we know it.
The lesson is to stay patient and wait for the market to come back. Now, some of you can’t do that if you’re retired or close to retiring, and I get that. But I would still urge you to ride out the storm – we’re in the worst part of this right now.
How long did the 2008 rebound take?
To completely rebound from the Great Recession, it took about four years for the market to get back to normal. The same thing happened with the crash in the early 2000s – about four years.
By no means am I an economist, but based on everything I know, my background in finance, and understanding the markets as well as I do, I’ve consistently said it’s going to be a good three to five years before we fully recover from the coronavirus crash.
Now, that’s dependent upon a lot of things, such as stimulus packages, fiscal policies that help American citizens, vaccines created, and more clarity around the virus itself, to name a few.
Can we apply past lessons learned?
We can, and absolutely should, apply past lessons learned from 2008’s Great Recession. The first, and most important thing to remember, is that it’s not the end of the world. That’s right – I said it.
I was in the thick of it for 2008’s Great Recession. In fact, I’d just graduated from college and was looking for a job. Thankfully, I found one that was 90% commission-based, but a job nonetheless.
And it was working for a major bank – one of the banks at the center of this whole crisis.
So I can tell you that from both inside the company as an employee, as well as outside the company as a consumer, it really felt like things would never get better.
People were panicked. They were nervous to spend any money and nervous to keep it anywhere other than under their mattress.
I remember people starting to panic-buy things like canned goods and other staples (sound familiar?). There were similarities, but it was more based on human behavior.
And guess what? We came out of it after a few years and things skyrocketed again.
So despite what it seems right now, even considering all the unknowns about the coronavirus, our slow reaction time, and a lack of vaccines and supplies, we will make it out of this, and so will the financial markets.
That leads to the next point – don’t hurt your financial future because you’re worried right now. If you panic-sell stocks and blow a ton of money on survival gear you’ll never use, you may come to regret it.
My advice is to keep an eye on the markets, continue to invest, and just ride the wave. Don’t add to the panic. Don’t hoard supplies. Just be patient – which I know is hard to do right now. But remember, we’ve done this (several times) before.
It’s an interesting time for sure. And while there are similarities between the 2008 recession and this one, I do see far more differences. That doesn’t, however, mean that we aren’t going to make it through this. We will, but it will take time.
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