- Some prognosticators say the downturn has ushered in a "new normal" era of slower economic growth and muted investment returns.
- Comparing current conditions to those of the past suggests today's environment isn't so different.
- Every recession and bear market is unique in some ways and similar in others.
- Believing "it's different this time" is likely to be as costly now as it has been in the past.
Stocks were down Friday but finished the week up overall, hitting new 2009 highs midweek. The S&P 500 and MSCI World both rose 1.5% for the week, bringing their gains since the March 9th low to 63% and 71% respectively. As astounding as the market rally over the last seven months has been, some are bracing for leaner times ahead. Skeptics say the recession has been so severe and its impact so lasting, we're in for a "new normal" era of below average economic growth and investment returns. But is this economic and stock market downturn really so different? We'd say not nearly as different as some think.
There's no arguing this period has been exceptionally painful, but to varying degrees aren't all recessions and bear markets? The table below highlights a few key economic statistics from peak to trough during recessions going back to the Great Depression. The data from the current downturn certainly aren't glowing, but they're not so much worse than the past to suggest the US can never fully regain its footing. From its peak in Q2 2008 through Q2 2009, real GDP contracted -3.8%. That's a meaningful contraction, but not too much worse than the early ‘80s, mid-‘70s, or ‘50s. Comparing drops in industrial production and increases in unemployment tells the same story.
Obviously, this data isn't exhaustive. There are hundreds if not thousands of economic measures to choose from. Most clearly reflect the fact we've experienced a steep recession, but none we can find indicate a permanently hobbled economy.
That's not to say everything is exactly the same as the past. Every recession and bear market is unique in some ways and similar in others. Naysayers see elements of this cycle distinct from the past: Financial engineering gone awry, over-extended consumers, a defunct "shadow" banking system, a defunct regular banking system—the list goes on and on. But what about the similarities? People aren't fundamentally different. We're still motivated by fear and greed. Sometimes we're overconfident and sometimes not confident enough. We still create and innovate. Firms still seek profit.
From an economic standpoint, this wasn't the first banking crisis, investor panic, or credit crunch we've recovered from. Nor will it be the last. And basic economic fundamentals like the laws of supply and demand haven't changed. In our view, the many similarities between the present and past far outweigh the differences.
The sting of the period will persist in our minds for some time, but the world isn't such a different place today than it was just a couple years ago. It's been said the most dangerous words in investing are "It's different this time." The wisdom of that old adage hasn't changed either.