At the beginning of 2020, everyone was expecting markets to lose some weight due to global macro factors and slowdown in growth. And, this was evident from rising gold prices and economies failing to drive in demand-based growth. But, what happened next is history, not only for Indian markets but also for the global markets.
The record-setting drop in stock prices wiped out entire gains of the last 5-6 years, leaving portfolios bleeding. Not only equity stocks bore the brunt, commodities like crude oil, natural gas, copper are also trading at multi-year low levels.
Compared to the 2008 financial crash, the current situation of stock market crash is grimmer due to uncontrolled fear in the market and the high possibility of the world slipping into recession.
Let’s check how the COVID-19 crisis is affecting the world and how it is different from 2008.
Highly Uncertain Environment
Unlike the 2008 financial crash, the 2020 market crash is not due to the weak financial sector, but it is more about the uncertainty of the virus taking a toll on the world economy.
In 2008, soon after Lehman Brothers went bust, the world went into recession, as it was a major systematic failure of a developed economy. But, then there was at least some sense of understanding of the situation, and the central banks of different economies intervened accordingly to manage the crisis.
But, in the 2020 stock market crash, the world is fighting an invisible enemy (COVID-19) and no one knows to which extent it can spread or how to restrict its spread. Major world trade centers like Europe and the United States are the most affected, crippling the international trade processes.
In the modern world, we have never imagined a situation, in which a virus will bring the world to a standstill.
As the virus spread, economies around the world closed their borders and suspended people’s movement from one place to another. This has adversely impacted the process of economic growth and has led to stagnation.
And, no one is sure, when the countries will fully open-up and everything will return to normal.
In 2008, businesses that went bust or downsized their operation was mainly due to the liquidity crisis. And, much of the spending was through debt. But in 2020, there is no such crisis, but businesses are forced to shut their shops, that too for an extended duration due to the emerging health emergency.
This is resulting in zero revenues for most of the businesses and affecting the financials, as they are continuing to incur fixed expenses and employee costs.
The disruption in the global supply chain due to coronavirus pandemic has resulted in thin demand for goods and services. In the 2008 financial crash, central banks and governments worked out several bailout packages, which helped businesses and markets to overcome the crisis quickly.
But, in the current scenario, despite the intervention of the central bank through monetary policies and bailout packages, the demand is most likely to be subdued for a very long time. And, as the recovery trend from the virus is very slow, thus the chances for businesses to return to full normalcy anytime soon is highly unlikely.
The COVID-19 pandemic has sent an economic shock around the world. The latest estimates from the UN is suggesting that the global GDP could shrink by 0.9% in 2020 as against the growth estimate of 2.5%. It also added that the contraction would be much higher if governments fail to come up with suitable relief packages that would help to boost consumer spending.
Job losses, salary cuts, businesses closing down would be a common scene in the next few months to follow. And, one thing is sure, the world will not be the same anymore post the recovery from the COVID-19 pandemic. Economies and businesses will bring in drastic changes in the way they operate and function. The trend we have seen after every financial crash, be it 1929, 2000, or 2008, and every time the world recovered and emerged much stronger.