A recent article from CNBC outlined three major differences between then and now and what those differences mean for financial advisors moving forward.
1 – Banks to Blame
During the Great Recession, the banks were largely to blame. The banks approved mortgages for subprime borrowers in unprecedented numbers, inflated their profits, minimized their risk and ultimately created a housing market bubble that burst. This time around, the market volatility is largely due to uncertainty created because of the virus’ impact. Even though Jerome Powell, chairman of the Federal Reserve, said the economy could contract by as much as 30% during the second quarter, banks are better equipped to weather this storm. For comparison, the biggest quarterly drop during the Great Recession was 8.4%.
2 – Quick Draw
During the Great Recession, Lehman Brothers was allowed to collapse. The Bush and Obama administrations took action—by providing liquidity through TARP and offering fiscal stimulus to the tune of $941 billion.
In the current crisis, the Federal government acted much quicker. The Federal Reserve cut the federal funds rate to almost zero, and kicked off a corporate bond buying program. The Federal government also passed numerous relief and stimulus packages, including a $2 trillion stimulus package in March alone, the month the outbreak exploded in the U.S.
3 – Market Freefall
During the Great Recession, the major stock indexes fell 50% over an 18 month period, which caused many investors to ditch the markets and ultimately miss out on the rebound.
The market freefall during this crisis was much more swift, leaving many investors shellshocked into inaction. For example, the S&P 500 dropped by 34% between Feb. 19 and March 23, the quickest descent into a bear market in history.