GFC vs Coronavirus Market Update

The current pandemic is like nothing the world has ever seen before. Many people are now questioning whether we are heading into a period of economic crisis reminiscent of the days of the Global Financial Crisis (GFC).  Whilst it is still early days in the current crisis, we wanted to give you an overview of the similarities and differences we can make with the GFC.

As you can see above, even if you had invested just prior to the start of the GFC in late 2007, in the following years you would have reaped the benefits of a strongly rising market, in both Australian and Global shares (as represented in the chart above by the yellow and light blue lines) compared to holding cash, shown by the dark blue line.

Comparing the GFC and the Coronavirus Crisis

We can draw some interesting parallels between these two crises;

• Whilst the GFC was initially a financial crisis, starting in the banking sector, the Coronavirus is a public health crisis that is also having a significant impact on the economy. Therefore, the ability to bring the crisis to an end will be a combined approach by both doctors and Governments.
• In an increasingly connected world, the current crisis has played out much more quickly than during the GFC. The speed of the crisis has been much faster this time around, both because of its nature, but also because many industries have had to shut down almost overnight.
• Fear levels in the community are certainly just as high as during the GFC, although the type of fear is different. Currently, people are also fearing for their life, along with their financial wellbeing. The prevalence of social media in society these days has contributed to the rapid spread of fear.
• The Government has played a similar role in both crises – most importantly with their stimulus packages. Massive stimulus programs were and are being implemented. The goal is to ensure that the financial system remains working until the crisis passes
• Interestingly, the GFC and Coronavirus responses by governments are different to what was done during the Great Depression after 1929. Back then, governments were too slow to provide help, so the recovery took much longer in the 1930’s than it did after the GFC.
• The major drawback of the stimulus programs will be increased government debt levels. Many governments, including in Australia, struggled to reduce their debt in the wake of the GFC. After the Coronavirus crisis passes, bringing government debt levels under control will be very difficult – it will be up to future generations to repay the money.  It will also be much harder for governments to use interest rate reductions to stimulate the economy in the future, as interest rates are already at very low levels.

What action should you take?

If a vaccine is developed quickly, we may see a strong and fast rebound in markets. If it takes too long and the virus continues to spread, with more prolonged community lockdowns, markets and economies could suffer further pain. It is difficult to predict how long it will take. Understandably, people are worried not only about the health impacts of the virus, but also about the health of their investments. It is crucial to reach out to your financial adviser to have a talk about your situation. Understanding your current circumstances and discussing these with your financial adviser gives you the best opportunity to ensure that when this crisis passes, as it did with the GFC, your portfolio is positioned appropriately to provide for your future goals.

If you have any further questions, please contact my office.

*Authorised Representative of Millennium 3 Financial Services Pty Ltd