Market downturns ... and recoveries

04 March 2020 | Markets and Economy


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In this short video, Vanguard economists Joe Davis and Roger Aliaga-Díaz discuss what the coronavirus could mean for the risk of a recession in the US and how its economic ramifications compare with those resulting from the global financial crisis.

Joe Davis: I think the one important point for investors to keep in mind is, listen, market volatility has spiked up significantly. In one sense, I think what was abnormal was the lack of volatility for several, well, for more than a year. But this is unnerving. I think we will hear increased conversations of the potential for recession, and the US could fall into a recession this year. I think, however, it's very unlikely that we're going to see the sort of economic ramifications like we saw from the global financial crisis. Would that be fair, Roger? That was close to depressionary levels. That doesn't mean, though, it can't be uncomfortable in terms of volatility and returns. I don't know, your perspective …

Roger Aliaga-Díaz: Absolutely. Yes.

Joe Davis: I think it's important to separate because there's natures of an unfortunate disease spreading that I think is different from the global financial crisis, where there was a massive deleveraging of housing that really left a long period of job losses. Our expectation, this would be different in that sense.

Roger Aliaga-Díaz: Absolutely. Yes, with all the uncertainties that you could expect of trying to predict the number of cases and how fast it goes. But, yes, I would say the main difference—because people tend to think of the global financial crisis in October of '08—I would say the main difference at that time was not just the magnitude of the shock. I think the markets in '08, they were anticipating this prolonged, this tail … because essentially the financial system imploded, so there was no quick recovery from that, even after the shock.

Joe Davis: Yes.

Roger Aliaga-Díaz: In this case, clearly, the markets are trying to assess the severity of the situation.

Joe Davis: Pricing the probability of a recession and all that …

Roger Aliaga-Díaz: Pricing the probability. But there is a clear understanding that at some point—for example, even in China, where some of the growth rates of the cases are leveling off—at some point, things, if they get contained, get under control, you could get a typical recovery both from the economic and from the market perspective.

Joe Davis: When the number of cases globally starts to crest—although, there is, unfortunately, there's suffering, there's concern—the financial markets will start to look at that and then would move on. So I would say for investors if one is—again, these will be trying times. They have been, they will be. If they're looking for the “all clear” on just the economic front, as we've counseled times in the past, by the time that we would see “all clear” on the economic front and the medical front, the market has moved on.

Roger Aliaga-Díaz: Past already, yes.

Joe Davis: Because they're already trying to get a sense, because the market is trying to assess future cash flows for corporate earnings, bond returns, and so forth.

Roger Aliaga-Díaz: If anything, the bar now is so low after that market correction that you could get positive surprises in the prospects.

Joe Davis: Yes.

Roger Aliaga-Díaz: Again, we don't know yet, but we may find out and the market may find out that it was not as bad as they initially thought.

Joe Davis: Yes.

Roger Aliaga-Díaz: So that's typically how markets react and sometimes overreact a little bit.

Joe Davis: And that's going to be important just for investors to keep in mind. We do not know when the bottom will be. But in the same way, we were in one sense counseling, “Hey, let's not get overexcited.”… I mean the stock market at the beginning of the year was fairly frothy. That works also in reverse, in that the market at times can become almost too pessimistic. It's trying to assess a broader range of odds.

Roger Aliaga-Díaz: As we are too.

Joe Davis: Yes, as we are too, right. And so I think that's important. Where you could have the economic data start to really become disappointing in the United States in March and April, hopefully not May. But then you could have the financial markets move on. That's why that's that disconnect.



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© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.


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