After enduring the largest decline the stock market has seen in a decade, many investors are wondering if 2008 is happening all over again. Turmoil in the stock market has brought back fearful emotions that many investors haven’t felt in years. Although in some ways it may feel like 2008, our present situation is actually very different.
The seeds of the great financial crisis began years before the crisis came. Headed into 2008, there were bubbles in housing and construction. Weak regulation of banking and lending left the financial system vulnerable. When the housing bubble burst, it caused unemployment in those parts of the economy and created big problems for the banking system. Many of those unemployed workers were forced to find employment in new occupations.
Heading into the current crisis, there were no obvious bubbles in the economy. Banking regulations are much stronger than they were before the great financial crisis. The banking system was in very good financial condition when the current crisis began. Once this crisis passes, the vast majority of people who are out of work today will be able to go back to their occupations.
Policymakers were slow to respond as the 2008 crisis developed. The 2008 stimulus bill was about $150 billion dollars, much less than the $1.5 trillion Congress is expected to approve this week. It took the better part of a year for policymakers to understand the size of the economy was facing.
In contrast, the policy response today has been both rapid and massive. The Federal Reserve has been quick to re-deploy many of the tools used in 2008. Unlike 2008, these programs were launched within weeks of the crisis starting, not months or years later.
The Fed is also creating innovative new tools to help parts of the economy that weren’t reached by its measures in 2008. The Main Street Business Lending Program is one example of new programs by Federal Reserve to help small businesses.
These measures are unprecedented in both their speed and scale.
What will happen in the next few weeks is uncertain, but we already know what will happen in the long run.
The US economy will survive! American businesses are rising to meet the challenge of defeating COVID-19, just as they have every previous crisis. Manufacturers are rapidly retooling to produce needed supplies and equipment. Healthcare companies are hard at work creating treatments and searching for a vaccine. We don’t know exactly how long it will take, but things will get better.
The US economy has survived far worse problems than the one we currently face. The past 150 years have seen world wars, civil war, a depression, and financial panics. There were pandemics in times when medicine was far less advanced than it is today. Students of history know that the markets and the economy recovered from those shocks, and it will recover from the current crisis.
History teaches us that at the darkest moments, things usually aren’t as bad as they seem. The markets tend to figure this out long before the news headlines turn positive. This is why investors who try to time the market usually end up selling low and buying high. Wise investors know best way to build wealth is to own great companies, and to continue to own them when others are afraid.
The markets will recover. They always have.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer