Lessons from The Past
History doesn’t repeat itself, but it often Rhymes!!
The last couple of decades, or even the entire century has seen some tremendous advancements in various fields. Technology, Aviation, Automobile, Agriculture and the list goes on. The Medical Science, with the advent of the integration with Technology, has grown by leaps and bounds. And still the world was not ready to face the events of early 2020.
The new year was filled with chaos and concerns in organizations like WCHC(Wuhan City Health Committee) of China, CDC(Centers for Disease Prevention and Control) and WHO. Some individuals from Wuhan had reported flu-like symptoms to the nearby hospitals in December, 2019. The doctors took a while to detect the presence of a virus, but couldn’t figure out what exactly it was. The number of patients kept increasing with similar symptoms. And finally, by the end of the year, the Chinese Authorities realized that they were dealing with something beyond their expectations.
WHO was informed about the detection of a virus of unknown etymology. The Seafood Wholesale Market of Wuhan along with other wet markets got closed indefinitely, post that. The Chinese social media, particularly WeChat, was flooded with messages and leaked reports about the virus. It was just a formality for the WHO to declare about the outbreak officially. The events unfolded rapidly post that.
COVID-19 was the name given to this disease which went on to become a global pandemic. It took just a span of one month to travel from the wet markets of Wuhan and enter into the streets of Washington. The number of patients grew from hundreds to thousands in no time. On 11th January, China reported its first death, caused by the virus. By the time countries took steps to curb its spread, it had already shown its symptoms in the charts of Wall Street. The pandemic had turned into panic for the investors and the global economy was on its way to take yet another blow of the century.
The DJIA had started facing significant volatilities towards the end of February. Investors were already skeptical about the ongoing US-China Trade War and the sinking Oil Price owing to the tensions between Russia and Saudi Arabia. But the worst was yet to come. On 9th March, the Dow fell by a staggering 7.79%. Following the WHO declaration of COVID-19 being a pandemic disease on 11th March, governments of several countries swiftly began imposing lockdowns. It severely affect the schools and colleges, non essential businesses, malls and theaters, parks, gyms etc., to name a few.
The results were devastating. By 23rd March, the Dow had tumbled by almost 30% from the record high in February. The indices of all the developing and developed countries had plummeted. Around 20 Million jobs got wiped out of US economy, taking the unemployment rates to an all time high of 14.8% in April. The impact was comparable to the Global Financial Crisis of 2008.
The world had come to a standstill and another recession was inevitable.
Economic Recessions are not something new for the world to witness. It often begins with an external stimulus, which results in a stock market crash. Going by the bookish definition: A crash is a sudden and significant decline in the value of a market. If a crash leads to a widespread economic contraction, lasting for several months, then its termed as recession. And if the same persists for decades, it turns into a depression.
We need to flip through the pages of history to get a deeper insight on these terminologies.
Herbert Hoover, 31st president of the US, took the office on 4th March, 1929. Being a staunch supporter of capitalism, he believed that a free-market economy can sustain itself without any significant intervention from the government. It had been a decade, since the World War I ended. The US had emerged victorious along with Britain and France. The exaggerating glamour and prosperity, made that era being called The Roaring 20s. The idea of buying in credit and paying later had flourished the economy. In the race of getting even richer, people invested heavily in the stock market. And gradually, the idea of credits began entering the Wall Street.
There was a widespread belief, that the worst days are gone and the market will only go up in the future. And this notion convinced the investors, that it’s absolutely safe to invest by taking loans from others. Any speculating individual would have believed the same after looking at the charts and figures. The Dow had boomed by 500% in a span of 5 years. The concept of Margin Trading had done its job marvelously. But little did they know, that this Boom was nothing but a Bubble in disguise.
The Wall Street saw a terrible day on 24th October, 1929. The Dow had plunged by 11%. But the downward spiral didn’t stop the following week and the values sank by more than 20% by 29th October, which got infamously popular as the “Black Tuesday of 1929.” The glamorous days of 20s had come to an end and by 1933. The Dow plummeted by 90% from the last peak of 1929. Industries were shut down, businesses got closed and millions got unemployed. Poverty had overpowered prosperity and unemployment had reached its peak at around 25% with GDP sinking by 30%. The poor citizens were in queues for food while the rest waited before banks to withdraw their lifetime savings. More than 9000 banks had failed in the decade of 1930s. The poverty-stricken homeless people built shanty towns across the country, called “Hoovervilles”, as a mockery to president Hoover and his inability to save the economy. The recession had turned itself into a depression to be remembered for ages.
The recovery commenced with the election of the 32nd president, Franklin D. Roosevelt. Within a span of 100 days he signed the New Deal into a law, which went on to revive the economy of the US. The new policies were loosely based on the Keynesian Economics, which supported the fact that, the government should have an active role in regulating and stimulating the economy. The Federal Reserve was highly criticized for mismanaging the credits, interest rates and lack of adequate supply of money, after the crash of 1929. Several policies were rolled out to prevent such blunders in future. After an excruciating decade, the GDP and unemployment rates were back in good shape. The Dow had reached, one-third of its pre-crash value by 1941.The Great Depression of 1929, finally came to an end.
There have been a couple of recessions post the events of 1930s. But none of these were huge enough to repeat the chaos and turmoil of The Great Depression.
The Black Monday of 19th October in the year 1987 saw a horrifying plunge of 22% in a single day. Technology had replaced humans for handling large scale trading activities. Computer programs were set to sell the shares automatically in huge quantities if a certain price was hit. And eventually several programs executed the sell orders rapidly, taking the values of the indices to a record breaking low. In return, the exchanges introduced strict rules for the automated trading programs along with Circuit Breakers, which stops the trading activities in case of incessant selling in a particular day. The Dow was back to its pre-crash values within 2 years.
The Great Recession of 2008 can be considered as the most recent one in 21st Century. The early 2000s saw a huge demand in the real estate market. To prevent an economic contraction, post the 9/11 events, the Federal Reserve pushed down the interest rates to such lucrative levels, that owning a home in the US was just a cake-walk.
Let’s assume, I want to buy a house. And for that I went to a bank to get a loan. Then the bank would initiate a background check considering my annual income, assets, credit score etc. And if they’re convinced, that I’m a credit worthy individual then only they would sanction an amount. Now let’s consider a hypothetical scenario. I have almost zero assets and a very low income and still want to borrow. And the bank says, “Cool.. No Problem!! We can still lend you the money.” And this hypothetical scenario was a reality in the US. Thanks to something called, Subprime Mortgage. There were well constructed homes all around. The prices in the real estate market was sky high and so were the indices. But people were in huge debts and nobody knew how to repay those loans.
On September 2008, the bankruptcy of Lehman Brothers, a 164 years old financial institution, added fuel to the gradual downfall. The Dow sank by over 1000 points in a month. Since the banks and financial institutions were involved, it started affecting the economy globally .The indices of several countries kept on declining till 2009. The recovery was slow and complicated. On February 2009, post Obama’s win in the presidential election, Congress passed the American Recovery and Reinvestment Act with a $787 Billion economic stimulus to end the recession. New policies were introduced for the Federal Reserve to regulate the money lending system of the banks, in order to prevent bad loans. It took 5 years for the Dow to get back to its pre-recession values.
Now coming back to the year 2020, when the market showed all the possibilities of an upcoming recession, something strange happened. Instead of going for a downward spiral, it went on to form a V shape and recovered within a span of 6 months. So who did that miracle..??
The answer is “Credit.”
Central Banks around the globe injected tremendous liquidity in the financial system. The governments had underwritten huge loans to companies, along with astonishing low interest rates, for the sustainability of the businesses. The Federal Reserve supported the transaction of corporate bonds, allowing businesses to borrow in huge scale. It allowed, almost 0 interest rate loans of worth billion Dollars, for several markets. They applied, what they had learnt from the previous crises: swift action without much political intervention.
The technology companies were barely impacted by the lockdowns. At least one wheel of global economy was immune to the virus and kept running, and that too in full speed. Their thriving success and a global optimism kept the indices from sinking. When the lockdowns got relaxed a little, industrial production started gaining some momentum. The quick action by the virologists around the globe to come up with patents and prototypes of vaccines, added to the optimism. The presence of technology backed brokerage firms and their easy to use mobile applications allowed the retail investors to trade with ease. According to market research firm J. D. Power, more that 10 Million brokerage accounts were opened in 2020. As of January 2022, the indices globally have fully recovered from the crash. The GDP growth rates, unemployment rates, industrial production figures and many more data supports the fact, that the global economy is stable as compared to that of 2020.
From all the recessions and stock market crashes in the past, it can be inferred that there’s always a bounce back in the economy. The biggest challenge for the powerful individuals, during such tough times, is to elevate the lost confidence of the investors and people for investing. And it’s evident that with each global financial chaos, the world has learnt a lot. The markets are in a decent condition these days. But for how long..? Are we heading towards another recession..? Several economists have highlighted that in the coming years, the stock market and the economy may not go in tandem. The rising global tensions, shortage of supplies, unexpected climatic changes, depletion of natural resources, failure of the vaccines to contain the COVID-19… the reasons are numerous. We can simply sit back and watch the game with a hope, that the elites in power will save us, using their lessons from the past.