Is the Covid Crisis a Recession or a Depression? (Historical context)

“History does not repeat itself...but if often rhymes” - attributed to Mark Twain

     In the decade leading up to the crisis the Federal Reserve cut interest rates, and unemployment descended to near-record lows.  At the same time corporate debt surged, and the U.S. pursued protectionist tariffs.  Then the Great Depression occurred.          

     The 1920s uncannily parallel our past decade, therefore it is instructive to compare today’s COVID Crisis to the Great Depression (beginning in 1929).  We will also compare it to the recent Great Recession (beginning in 2007).  The table below reveals that the COVID Crisis is more damaging to the Global and United States economy than the Great Recession, and of a similar magnitude to the Great Depression: 

1 No reliable annual worldwide data exists for the Great Depression. Source for World Product during the other periods: International Monetary Fund 

2 Sources: International Monetary Fund, World Bank

3 Source: Congressional Budget Office

4 Stimulus equals fiscal stimulus plus quantitative easing, divided by the GDP at market top. Sources: St Louis Federal Reserve, International Monetary Fund

     The economic damage from today’s Crisis will surpass that of the Great Recession in almost all measures.  The Federal Reserve defines a recession as a significant decline in economic activity lasting more than a few months, and a depression as a severe downturn lasting more than a few quarters.  The COVID Crisis is similar in magnitude to the Great Depression; however, the present Crisis will have to persist for many quarters before being classified a Depression.  During the Great Depression the U.S. experienced GDP contraction (negative growth) in five years between 1929 and 1938.  Additionally it took 25 years for the S&P 500 to return to pre-Depression levels.     

     The amount of stimulus fighting the COVID Crisis already exceeds that of the Great Recession (2007).  Stimulus is either fiscal stimulus (from legislation such as the Coronavirus Aid Relief and Economic Security or 'CARES' Act) or quantitative easing (from the Federal Reserve purchasing securities such as high-yield bonds).  In order to standardize the size of stimulus across time, stimulus is divided by U.S GDP at the respective market top. (For example, in February 2008 Congress passed the Economic Stimulus Act at a cost of $152 billion.  Gross Domestic Product prior to the Great Recession [2007] was $14,713 billion; therefore the Economic Stimulus Act of 2008 cost approximately 1% of GDP at the time.) 

     Below is a graph showing the S&P 500 recovering during the Great Depression (1929) and the Great Recession (2007), along with bubbles showing stimulus.  These stimulus bubbles are scaled proportional to their cost (in percent of GDP at the time):

The COVID Crisis occurred so abruptly that a tracing of the S&P 500 on the same monthly scale looks like a vertical line and is unhelpful; therefore the COVID Crisis is plotted on a separate graph with a timescale in weeks:

     Over the past century, stimulus has occurred more swiftly in times of market turmoil.  During the Great Depression it took several years for significant stimulus (the largest blue bubble of stimulus is the New Deal enacted in 1933).    In 2008, significant stimulus came a little more than a year after the market dropped.  In 2020 significant stimulus arrived within a month of turmoil. 

    

     Large stimulus has occurred near market bottoms; however, there is lag between when stimulus occurs and when markets have found an enduring bottom.  For example, in 2009 the S&P 500 dropped an additional 14% after Congress passed the American Recovery and Reinvestment Act.  Furthermore, Japan endured Lost Decades beginning in 1989 over which the Nikkei Index declined 65% despite repeated stimulus (today the Nikkei remains 45% below its 1989 peak).  

     Although it is unlikely that the COVID Crisis will last as long as the Great Depression, the COVID Crisis is similar in size to the Great Depression, and exceeds the Great Recession in size.  Yet U.S. markets have lost less in the COVID Crisis than during the Great Depression or Great Recession.   Aggressive investors will likely find pockets of value (I recently purchased XLE), and for this reason I am "Bearish" and not "Very Bearish."  But given ominous historic parallels (to the Great Depression and Japan’s Lost Decades), investors would be wise to remain cautious.  It is unlikely that the COVID Crisis bear market is over.  

This report reflects the current opinion of the author.  The report is based upon sources believed to be accurate and reliable.  Opinions and statements about the future expressed in the report are subject to change without notice.  The report is not a solicitation or an offer to buy or sell any security.