Acting on the Lessons from 2008

Mar. 20, 2020

Recent market volatility and a constant stream of negative news is giving investors déjà vu. A downturn this abrupt and severe hasn’t been seen since the beginning of the 2008-09 Global Financial Crisis.

The situations may be completely different, but the feelings of fear and uncertainty are the same. Having a perspective on how these two major market meltdowns are similar and different can provide long-term investors a game plan for weathering the storm.

Different Sparks

Every recession has a different spark. The problems of the Global Financial Crisis originated from within the financial system. Too much leverage, too much housing risk, and a willingness to overlook systemic risks led to a bubble that was bound to burst.

Once it became clear that a housing crisis was upon us, a domino effect unfolded. Banks failed, people lost jobs, and cratering home prices brought the economy to a halt. While the financial crisis stemmed from internal imbalances, the problems didn’t stay contained.

The causes of today’s crisis are far more external. Just last month, the US stock market was at an all-time high, unemployment was at a fifty-year low, and the economy was riding high on a historically long expansion streak.

There were some areas of imbalance, such as high levels of corporate debt, giving some investors pause. Still, the economy was on solid footing before the virus spread. Sometimes out of nowhere events shock the system.

Similar Conditions

The causes of the two crises may be different, but the investment conditions going into them have many similarities.

In the years before the housing crash, markets were climbing, and many investors were taking on more risk than they should. Sophisticated investors ignored warning signs in the housing market, the mortgage market, and more. Conditions were ripe for a downturn when things began to unravel.

Likewise, at the start of this year, financial markets were ten years on into a bull run. Stock market valuations were expensive, and corporate profits were steadily rising. At the same time, central banks were maintaining easy monetary policies with historically low interest rates.

With so much over optimism about the future, investor expectations had become too high. Markets were susceptible to weakness should something unexpected happen, like a global pandemic. Different sparks caused the two crises, but similar conditions set up both for weakness.

Unpacking the Results

Social distancing, self-quarantining, and temporary job loss have resulted in millions of Americans drastically reducing their spending. There is little economic data yet on the severity of the crisis, but we know economic activity has materially slowed.

One key difference has been the speed at which central banks are providing liquidity. They have clearly learned from prior crises. Old taboos are being tossed aside, and vast amounts of fiscal and monetary stimulus is being encouraged. Swift policy reaction to do whatever it takes may make a huge difference this time around.

Still, like other economic downturns, there is a good chance that unemployment will spike. Companies of all stripes are under threat, and many are now cutting pay and laying off workers.

Job insecurity is causing people to focus on saving money and protecting assets. People are hunkering down, spending less, and saving more. Some believe the external nature of this crisis will imply a shorter timeframe, but there’s no evidence this will be the case, and the economic uncertainty is very much the same.

The Lessons of 2008 and What We’re Doing

Bear markets are always painful and challenging, and long-term investors could witness up to a dozen bear markets over the course of a lifetime. As difficult as it may be, investors need to keep a long-term perspective.

Most individuals or organizations with a multi-decade horizon should be focused on long-term results. And in order to achieve those results, investors must stick with their asset allocation framework, especially during market downturns.

Our investment processes are designed to deliver the results clients need over full market cycles. During this downturn, we have been systematically upgrading client portfolios as we find compelling opportunities at attractive prices. For multi-asset class investors, this has amounted to a gradual increase in our equity allocation. We believe our long-term perspective gives us the confidence to actively capitalize on opportunities as we see them.

We encourage investors to recognize that market selloffs will happen. Understand why sticking with your asset allocation is important, even if it feels painful, and you’ll be better able to survive another bear market.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

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