The markets rebounded last week, up over 10%. We’re back at May 2019 levels overall for the stock market. Why did this happen? Investors reacted to several pieces of information: signs that the social distancing is working and number of new coronavirus cases is flattening; a deal between Russia and Saudi Arabia on oil output; and movement by the Federal Reserve Bank to provide another $2.3 trillion dollars in support to the economy.
Those are all good things. On the downside, over 16 million people have filed for unemployment. And deaths from the virus continue to rise. If we can’t reopen the economy soon, there are estimates that 10% or more of small businesses may not survive the shutdown.
Which all sounds like we’re headed for the zombie apocalypse. Or at least another depression. Things are different than the Great Depression, though, for several reasons. The initial crash in 1929 was made worse by government policy. First, the Federal Reserve Bank tightened the monetary supply: they raised interest rates in 1928 and 1929, reducing the monetary supply by about 7%. Then, the federal government compounded this by raising both corporate and individual tax rates, cutting government spending by 25%, and increasing regulation. This was then made even worse by a protracted global trade war. The Great Depression lasted 10 years!
Compare that to the current crisis: The Fed has acted quickly and decisively to put liquidity into the economy. They have lowered interest rates and purchased government and corporate bonds, and increased lending capabilities to financial institutions. The government has dramatically increased spending and no one is talking about raising taxes right now. Finally, while we are still working through trade negotiations with China, as a whole, the global economy has much fewer protectionist trade policies. As a result, we expect the overall US economy to bounce back much more rapidly, and we are not looking at another depression.
And if you’re wondering what the difference between a recession and a depression is, a recession is a gradual decline of the economy that occurs over at least six months. In 1974, the commissioner of the Bureau of Labor Statistics gave a more in depth, dictionary definition. This included that there needed to be a 1.5 percent decline in gross national product—or the total value of all goods and services produced in a given year plus foreign investment—and unemployment needed to reach 6 percent or higher.
On the other hand, a depression is an extended recession or serious decline in the economy that lasts for years. For a depression to be in effect, unemployment rates need to rise above 20 percent and there needs to be a significant decline in gross domestic product, among other factors.
In short, a recession is simply a short-term economic trough, but a depression is a recession on steroids.
Since 1854, the United States has experienced 33 recessions and only one depression.
We still expect continued market volatility, meaning the market will have more drops to come over the next few weeks. If you’re fortunate enough to have retained your job, keep investing through this. If you have been laid off, take advantage of the various government programs, including increased unemployment, mortgage and student loan forbearance, and ability to tap into retirement funds. Do what you have to do to get through, and we’ll all dig out together when it’s over.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.
And if you don’t have a financial advisor, or you haven’t heard from yours, come talk to us. This is Ann Alsina with CovingtonAlsina.