We’re just over a decade since the collapse of Lehman Brothers due to the Financial Crisis of 2008. Due to their collapse, we saw a huge drop in the markets. Many banks and people have tried to analyse this to see if they can come up with a date for the next financial crisis. JP Morgan believes that this will happen in 2020. But are they right?
They have claimed that their estimation for 2020 should result in a less painful economic hit than the one we experienced in 2008.
I’d be inclined to agree that we are likely to see some form of economic hit in the next two years. These events tend to be cyclical to an extent, and we’re overdue something happening. We’re also in an era where until recently the stock-markets were at an all time high. Some would argue that some tech stocks, such as Amazon are highly over-priced. Could this lead to a sudden drop?
We’ve seen a lot of tech stocks have a significant plunge in recent months, but I would view this more as a correction of price, rather than a sign of impending doom in the world economy.
What should be expect to happen?
In the same report, JP Morgan has claimed we could see the following in the event of the next economic downturn:
- A jump in US Corporate Bond Yield Premiums of 1.5%
- A 35% drop in energy prices
- A 29% drop in metal values
- A 2.79% point widening spread in emerging country government debts
- A 48% tumble in emerging market stocks
- A 14.4% slide in emerging market currencies
- Most Importantly: A US Stock Market slide of 20%
I imagine most people who may find this interesting are looking at it from the perspective of investment. Most of us who have investments in the stock market will have shares in key US Company Stock. Therefore, we may see a pretty significant tumble in our stock portfolios if this is to be believed.
However, these are pretty unwavering figures compared to 2008, and something which shouldn’t be too much of a worry for weathered professionals in the investment world. Especially when you consider the S&P 500 dropped 54% from its peak during the 2008 crisis.
In fact, some investors may see this as an opportunity to grab stocks at a discounted rate. The phrase “the rich get richer, while the poor get poorer” rings true when it comes to financial downturns.
Who May a Recession Effect Most in the Stock Markets?
Well, statistics show that people are moving away from actively managed stock investments, in favor of index funds and the like. This could impact these investors the most, as their investment isn’t likely to be altered in order to combat the impact of a recession.
Due to the fact that the trend is to just put money into an index fund, and leave it, there is a lack of liquid capital to use in the markets during a downturn.
For those of us who actively manage our investment portfolio, we may have a balance of liquid cash waiting for the opportunity to buy bargain stocks. This, in turn, helps the stock market to recover during a downturn.
However, those of us who prefer a more “hands off” approach to investing may have a simple approach of just putting all they can afford each month into their index fund account. This means there is no rainy-day fund ready to prop up the market. We may find that the increase of this type of investing could heavily impact the recovery rate during the next financial crisis.
Length of the next Financial Crisis
This is something we don’t know. JP Morgan has also said they’re not entirely sure themselves.
The key here is that the longer the crisis happens, the worse it is for investors. If we were hit by a 50% hit to the stock market, but recovery only took 6 months, we’d be laughing our way to the bank. However, a very slow recovery over 5+ years is something we do not want.
Cause of the next Financial Crisis
This is an interesting topic of discussion. Obviously the last recession occurred due to the sale of sub-prime mortgages, and then everything spiraled out of control from there. However, what are people theorizing the next downturn to be caused by?
Tom Holland theorizes that it will be caused by the United States, and not China as some have speculated. JP Morgan have stated that we may end up in a “great liquidity crisis” in the next couple of years which has been caused by a domino effect of the quantitative easing evidenced during 2008.
Gary Shilling, who is known as one of the men who predicted the housing crisis which caused the 2008 recession in the early 2000’s has stated his opinion. He feels as though the main causes of economic downturns are wherever there are large amounts of leverage. In 2008, it was housing. He believes now it is in emerging markets. His main focus is on the $8 trillion emerging-market corporate and sovereign debt in the US.
Raghuram Rajan, chief economics of IMF agrees with Shilling to an extent, with the focus being on areas of leverage. He stated:
“You get hooked on leverage. It’s cheap, it’s easy to refinance, so why not take more of it? you get lulled into taking more leverage than perhaps you can handle.”
He also thinks that emerging-markets could cause issues. However, the issues currently seen in Turkey and Argentina are not at the point of fully-blown contagion.
The US economy is doing just fine currently. However, that will change at some point, and have an impact upon the investment horizon, globally. There will be another crisis at some point, and many point in the direction of the next 24 months. However, when specifically will it happen? Your guess is as good as mine.