Why It’s Not 2008 Again

A déjà vu of 2008 in markets lately? Mike explains why we think the coronavirus shock should not spark a 2008-style crisis.

The coronavirus outbreak is set to deliver a sharp and deep economic shock – akin to that of a large-scale natural disaster. Markets have been fretting over the economic impact, evidenced by moves that are reminiscent of the 2008 global financial crisis. But we think today is different. Social distancing measures to fight the outbreak will reduce economic activity dramatically, but this shock should not fundamentally derail the global economy, provided authorities deliver a fiscal and monetary policy response that is both decisive and comprehensive.

Developed market stocks fell as much as 27% since peaking in February, but pared losses in a sprint to Friday’s close. The magnitude of the selloff is like that in the aftermath of Lehman Brothers’ bankruptcy in 2008. See the chart above. Market volatility has also shot up, with the VIX gauge of U.S. equity market implied volatility soaring to its highest levels since the global financial crisis. We have also seen sharp swings in fixed income, with U.S. Treasury yields first hitting record lows and then closing higher on the week. Crude oil prices last week posted their largest single-day decline since the Gulf War amid a conflict between OPEC and Russia that has prevented action on supply cuts. What will it take to stabilize markets? A decisive, preemptive and coordinated policy response is key, in our view. This includes aggressive public health measures to stem the outbreak, as well as coordinated monetary and fiscal easing to prevent disruptions to income streams – especially to households and smaller firms -that could cause lasting economic damage.

The evolution and global spread of the coronavirus outbreak are highly uncertain. What we know: Containment measures and social distancing mechanically bring economic activity to a halt, as seen in China and Italy. There is a strong incentive to enact such measures proactively to slow the growth of coronavirus infections, and France and Spain over the weekend joined Italy in imposing drastic lockdown measures. The impact on economic activity will likely be sharp – and deep. Yet we believe that the sharper the containment measures taken and the deeper the economic hit in the near-term, the more confident we should be about the rebound after such measures are lifted. We see the shock as akin to a large-scale natural disaster that severely disrupts activity for one or two quarters, but eventually results in a sharp economic recovery.