How Market Volatility Amid COVID-19 Differs from the 2008 Financial Crisis

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April 02, 2020 - COVID-19 Industry Trends United States

We compare what's happening now in the market to 2008

The stock market's recent volatility and steep declines in valuations have caused investors to compare the current COVID-19 pandemic to the 2008 financial crisis.

However, there are stark differences, including their main drivers, the economic impact and the U.S. Government's stimulus responses.

There's no way to predict when this health crisis will subside or when business conditions will begin to normalize, but here's a breakdown of how 2020 is different from 2008:

Genesis

If you look at 2020 and 2008, there are vast differences between how and why the two market situations began.

The 2008 financial crisis was credit driven, largely from questionable underwriting standards and excess leverage in the sub-prime mortgage market. The collapse of Lehman Brothers in late 2008 accelerated the resulting stock market sell-off that had begun months earlier.

In contrast, the current crisis is being led by a serious global health threat. Containment measures have resulted in an unprecedented shutdown of economic activity across a wide range of countries and industries. Uncertainty around how long these disruptions will last has increased business uncertainty, created wild market swings and significant reductions in economic forecasts.

Impact

The impact of the 2008 financial crisis is one that Americans have felt for years, with the solvency of the banking system brought into question.

With mortgages and homeownership at the core of the crisis, it only added to the lasting effects, which resulted in a 57% decline in the S&P 500 Index over a period of 17 months.

"With the financial crisis, home ownership had increased to a level that was higher than historical averages and at the same time, you had a credit bubble in housing," said Sid Vaidya, TD Senior Vice President & US Wealth Chief Investment Strategist. "That impacted individuals, people lost their jobs, many either lost their homes or were unable to sell. There was limited mobility, because if you can't sell your home, you can't move for a new job. There were additional effects that lead to how long it took to fully recover."

After the 2008 financial crisis, it took over six years for the Index to reach its previous peak.

With the current crisis, we saw the S&P 500 Index fall over 30% from its February 19 high as the virus and fears over its economic impact spread. The implementation of aggressive monetary and fiscal policies have helped the S&P Index recover some of its losses.

With COVID-19, the economy has come to a "sudden stop," Vaidya says, because of efforts to contain the spread of the virus. Government regulations have also been announced to aid this goal, asking people to stay at home if they can.

"A lot of industries have shut down, travel obviously came to a complete stop," Vaidya noted.

The lasting impact of the virus is unknown, as we are clearly not out of the woods with the number of new cases reported in the U.S. still increasing daily.

Stimulus

One of the biggest differences between COVID-19 and 2008 is the stimulus response. Last week's approved $2 trillion stimulus dwarfs the $800 million that came in 2009.

"It's certainly more comprehensive," Vaidya said of what is now the largest stimulus package in U.S. history.

Included in the current stimulus is $250 billion funneled directly to households in the form of checks. Taxpayers that make less than $75,000 in adjusted gross income a year, will receive a one-time $1,200 check in the coming weeks with the benefits being phased out for those with higher incomes. Individuals filing will not get a check if they make north of $99,000 (AGI) a year. There are stipulations for other situations, including if you're married and filing jointly without children. For example, a married couple filing jointly, making less than $150,000 will get $2,400, but will be phased out if they earn more than $198,000. Additionally, for each child age 16 or younger in the family, there will be a payment of $500.

More than $350 billion will go to small businesses in an effort to help with payroll costs.

There's also major funding for hospitals and medical services that are dealing with stretched resources because of the virus.

Vaidya added that more aggressive action is needed now compared to 2008 when the economy didn't come to a complete stop, like we are seeing today.

On the monetary policy front, the Federal Reserve (FED) has also taken proactive steps to support the economy and alleviate stress in the financial system. The Fed cut its target range to nearly zero, but compared to 2008, when rates were much higher, the Fed had less room to maneuver. To provide further support, the Fed rolled out comprehensive measures aimed at boosting liquidity and providing some relief to investors.

Recovery

This is hard to compare as we are still in the midst of the current health crisis.

The stimulus package isn't meant to make companies and small businesses whole, Vaidya said, but to buy them time and keep them afloat while we slow the virus spread and efforts are made to create a vaccine which may not happen until early 2021.

Still, the track to recovery is more linear than that of 2008.

"Excesses in the system that we saw during the financial crisis aren't necessarily present here," Vaidya said. "Consumers and banks were a lot stronger and in much greater health heading into the current crisis."

Still, this crisis is vast in scope and requires a tailored set of solutions. Vaidya believes we are in the early stages of having those solutions in place, and although we will see news about the virus spread and the continued economic impact, he's confident that as the measures start having an effect, we will see a bottoming process in the market and the economy.

Vaidya says that if the virus can be contained within the next few months, we could see a strong recovery to follow.


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