Monthly Markets Memo - April 9, 2020
by Dan Zalipski, CFA
A recession may be likely, but could we see it turn into a depression? A depression is defined as severe and prolonged downturn in economic activity, lasting three or more years with an annual GDP decline in excess of 10%. No one expects this to linger three or more years. A 10% decline in GDP could be possible, but the consequences at this point would have little impact beyond how we label this period in the history books. Most market participants do not believe we are in for a 1930’s style depression.
The Great Depression wasn’t all that great. U.S. unemployment surged to 23%, international trade contracted by 50%, and global GDP shrank by 15%. For reference, Global GDP shrank less than 1% in the 2008 crisis. The Great Depression was made worse by policy makers at the time through four major mistakes. First, the Fed raised rates, tightening monetary policy to suppress outflows of gold, which also suppressed economic activity. Second, the government increased taxes on individuals and corporations to balance the budget. Third, the government cut spending by 25%, aimed again at balancing the budget. Finally, increased regulation and an ongoing trade war weighed on any potential recovery. These elements combined help explain why unemployment was still at 15% nine years into the depression.
Looking at today, we are operating under different conditions. The Fed is very accommodative, quickly cutting rates to stimulate the economy while providing liquidity to ensure markets continue to function smoothly. The Government is not raising taxes, but rather implementing policies to support businesses and individuals through this difficult time, including pushing direct cash payments to taxpayers. Trade issues linger, but nowhere near the same degree as the 1930’s.
These are truly unprecedented times. Fortunately, lessons learned from prior crises have guided policymakers to quickly and decisively act to support the economy. We see a prolonged depression being unlikely but recognize the timing of a potential recovery is uncertain. With companies set to announce first quarter earnings, investors will begin to get a feel for the extent of the virus’s economic impact. Furthermore, it appears that New York may be nearing its apex for peak infection, providing a glimmer of hope that the light at the end of the tunnel is approaching. We continue to promote patience, and find it prudent to maintain our defensive positioning, while looking for areas of opportunities as uncertainty gives way to recovery.
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