Global Covid Crisis (GCC) vs. Global Financial Crisis (GFC)

With this article I’ve decided to undertake an arguably pointless but certainly interesting exercise nonetheless: comparing the potential stock market trajectory of the GCC over the next 18 months by mapping it out to the historical stock data from the GFC, also known as the ‘Great Recession.’  Here is the GFC presented with Australia’s ASX300 end of month data 7 months prior-peak and 7 months post-trough.

From peak to trough, over a period of 16 months, the ASX300 fell by approximately 50%!

So this begs the question: is there even a point in making such a comparison?

Arguably, the GCC and the GFC are two scenarios with very different backgrounds and origins.

However, there are enough similarities between them which make the effort behind this thought experiment potentially worth-while: 1) Economies around the world have all significantly reduced business output; 2) World stock markets have crashed (falls of more than 20%); 3) Many companies are already bankrupt and some major companies might need to be bailed out; 4) Workers are losing their jobs and putting pressure on social safety nets; 5) World governments have initiated stimulus packages to soften the inevitable recession; and 6) General uncertainty across all countries and business sectors is very high*;

*Except for food production and essential products.  As it turns out, people still gotta eat and wipe their a**es.

Taking the same fall (50% over 16 months) and subsequent recovery (40% over 7 months) as during the GFC, the below chart is what the ASX300 may look like over the coming years:

Keeping all things the same going forward as the GFC and we’ll only see a recovery start in July 2021!

This thought experiment is just food for thought, as due to the incredible and unprecedented nature of this crisis, it is impossible for any investor to determine when the ASX300 or any market for that matter will bottom.  There are simply too many factors to crunch.

As investors it pays to have a sound strategy for our overall financial situation for the next 2 years.  Job security, cash reserves, and any debt obligations must first be reigned in and under some control before we can “get greedy when others are fearful”, as the Big Buff likes to say.

I certainly am hopeful that “this time its different” and that we find a vaccine, immunize everyone, and carry on living our economic and social lives, but I am preparing for a situation where “this time its not so different” however at this stage I am not planning for a “this time it will be even worse” scenario.

As they say, plan for the worst, hope for the best, and most importantly stay safe out there.


As always,

Invest Sagely (29/03/2020)