As a general rule of thumb, you’d expect big recessions to bring along with them largescale losses on stock exchanges and indices across the world. Logic follows that following one of the greatest global shutdowns in history, that demand would subsequently fall and as such profits and then share prices.
Furthermore, economic downturns often spark investor panic and capital flight out of the stock market and into safe haven industries and value-holding items such as gold or government bonds.
So, what exactly is happening here then? If we compare it to the 2008 financial crash for example, Forbes wrote “This recession brought the worst economic contraction since The Great Depression. Precipitated by a housing bubble which burst, U.S. stocks were only 2.7% overvalued when it began. Nonetheless, stocks proceeded to sink, ultimately losing 53.78% from peak to trough. By the time it ended, stocks had recouped about 14% of the loss, ending the recession down 40% from its October 9, 2007 peak”
In fact, for the past 6 recessions stocks fell anywhere between 30%-50% from peak to trough, and yet the stock market drop for the Coronavirus recession was so brief as to not only last less than 3 months, but the market also recovered it’s losses and then exceeded them in the same time period.
At the risk of overusing ‘unprecedented’, this is another event in 2020 that we can add to the list of things we weren’t quite expecting, to put it mildly.
What’s the explanation?
So how can this discrepancy be explained? Megan Leonhardt of CNBC explains that “while the market reflects the economy, its performance typically moves ahead of it. That’s why stocks have looked so disconnected from the economic fundamentals such as GDP, employment and inflation. The stock market started to drop off in February, but experts say we didn’t hit peak unemployment until May. In fact, the stock market has a decent track record of “sniffing out” when the economic situation has stopped getting worse”.
So, it would seem that if we’re to read this correctly according to received wisdom then the recession will be meteoric in initial impact, but the economy will very quickly and impressively bounce back if the markets are a vision into a wider economic future.
Not just this though, we also have to understand what exactly the wider context of tech stocks performing well during this pandemic means. The big tech companies, for example Microsoft, Facebook and Amazon have all performed very impressively in this time and the answer probably lies in rapidly changing habits that have been accelerated by an extended period stuck indoors.
Frankly, the brave new economic world that appears to be being ushered in by the pandemic probably would have happened anyway but has been massively sped up by circumstances outside of our control. Most people were slowly beginning to use all of these services more anyway, certainly at the expense of traditional retail and business, but the pandemic appears to have pushed this into hyper speed. So what else could be changed by this new reality?
Many had expected this sharp and deep economic shock to impact the property market, certainly in terms of demand and prices.
The received logic early on was that people worried about their jobs and income simply wouldn’t risk a potential mistake by upgrading their living arrangements and would be much more cautious with their spending.
That never happened and, in fact, actually seems to have driven even more demand than before with people putting an increasing focus and value on their home. After all, if you’d just spent nearly six months indoors with young children or a partner and your home didn’t suit your needs, wouldn’t you move that directly to the top of your priority list?
So then, now is a good time to have an interest in both big tech or UK property. Both share something of a common interest in that this pandemic has highlighted their increasing importance to us all and for those that are landlords, this has meant a very welcome new and profitable reality.