The US officially entered a recession in 2020, but the markets were still bullish with the S&P recovering from its fall earlier in 2020. For most, it never seemed like a recession since markets had growth so exponentially.
One of the critical factors in in this recovery has been technology and communication stocks, rapidly fueling the strong rebound, helping exceed previous record highs just before the coronavirus ended its 11-year bull run.
You can see below, the market closed at 12920.15 points.
So why has the market been behaving like this?
This has been interesting to watch as Wall Street has ignored for months, negative economic readings, and has recently ignored this big announcement around the recession.
There are two parts to this, federal intervention and the bet on a quick recovery, fueled by tech stocks (as mentioned just then).
1. Federal intervention
The Feds have been focusing on stimulating the economy and cushioning the blows the pandemic has been causing. This includes lowering interest rates to 0 and multiple stimulus bills with trillions of dollars being pumped back into the economy and people’s hands.
Additionally, the Federal Reserve announced a backstop by buying assets with its newly printed money. This also meant buying back government-backed bonds as well as riskiest investment-grade debt ones as well.
It’s good to note that because the interest rates are zero, it makes more sense to put money into the stock market where returns can be made, fueling growth for Wall St.
2. Tech growth + technology innovation
On the tech side, many companies like Amazon have seen record growth, many of which have fallen either in the cloud, communication, or online grocery companies. All of these tech companies have helped drive the indexes higher, providing resistance to an otherwise potentially disastrous drop in the indexes.
Even more interesting to note has been the ability of many people to work from home. This infrastructure to support this remote working movement was non-existent during previous recessions.
Is there anything we can learn from previous recessions?
Many are pointing towards previous recessions to find patterns to determine what will happen next in our current market.
Taking a look back into 08–09, the economy started shrinking on December 07. Investment banks crashed on February 08, but it wasn’t until September that the Dow Jones crashed by 777.68 points (the largest crash till 2020).
On an employment level, unemployment rose gradually with 2010 peaking at an all-time high.
But it’s different with the current 2020 recession.
During the current one, all of this has happened in less than a year with falls, rebounds, and unemployment shooting high (see the graph above).
But even with high unemployment, the significant differences are people have money in their pockets compared to previous recessions.
Disposable income leaped to 12.9% in April 2020, and personal savings rose to a historical 33% from April to May as many Americans (specifically the middle-class) are holding onto cash.
“Although unemployment is really troubling, the consumer balance sheet has been pretty strong” — Timothy Lesko, portfolio manager at Granite Investment Advisors, told CNBC.
Additionally, this has been a world-first where markets have been affected by a worldwide pandemic rather than the stupidity and greediness of banks and companies.
“You just can’t pull out the playbook of 2008 and apply it to 2020,” he says.
“With a pandemic, there’s no place to really hide — everyone is affected around the world.” — Campbell Harvey, Duke University Economist
This means one of the key differences is not the financial institutions being hit hard but rather our small and medium-sized businesses all across the world suffering from the economic situation.
With Wall St been powered by these financial institutions, many have not been affected by the change in circumstances, even with the grim news that has been hitting our headlines in 2020.
We also did learn from the 08 recession
During 08, the government took ages before deciding to take an active role, by eventually dropping interest rates to 0.
This time, the Fed almost immediately dropped it to zero, days after the president declared a national emergency. Additionally, the government has poured trillions into driving growth with multiple stimulus packages, as mentioned.
This quick intervention, as well as companies responding quickly with remote working policies, has kept many businesses afloat even with some industries suffering.
But recently we saw a pullback in the market
In the recent months, we've seen some shifts in the market.
Sectors that were super strong like the EV market have fallen tremendously and we've seen a shake up in the market.
Will this reality continue?
The truthful answer is we don't know.
Many are still on the fence and although plenty of analysts have stated certain industries are in a bubble, there are many that still see room for with in the market.
Although a small correction has started, we will have to see in the next few months to see if it cascades into anything in particular.
NOTE: This article is my personal opinion and should not be taken as financial advice.