310: Why the Stock Market and Economy Are Rebounding So Quickly

Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 310. It’s titled, “Why the Stock Market and Economy Are Rebounding So Quickly.”

Is It Really A Recession?

Last week LaPriel and I and our daughter drove 20 miles from our house to hike the Cascade Creek Trail in the southern part of Yellowstone National Park. We went to Terrace Falls along the Fall River. Took about 2.5 hours. We saw 6 people the entire time. But then we decided to take the long way home through Grand Teton National Park. And I was absolutely amazed at how many people there are. When we drove past the Jenny Lake Lodge and Visitors Center the parking lot was full and there were cars parked along the main highway. Dozens and dozens of cars. I have never seen this many campers and RVs in this part of Idaho. 

In some ways, it doesn’t feel like a recession. A recession is an extended period of economic retraction. When the dollar value of goods produced and services provided within an economy is shrinking. Of course, it especially doesn’t feel like a recession given the S&P 500 Index, a measure of US stocks, has closed near an all-time high. I talked about that aspect a few episodes ago in an episode titled “The Stock Market is Not the Economy.”  But the economy is also different during this recession than it was during the Great Financial Crisis.

We’re clearly in a recession. US Gross Domestic Product fell at a 32.9% annual rate in the second quarter. After falling at a 5% annual rate in the first quarter. On June 6th, 2020 a committee of the US Bureau of Economic Research officially declared the US was in a recession. 

In this episode, we’re going to explore how this global recession differs from the Great Financial Crisis of 2008 and 2009. And what could develop going forward. 

No Debt Crisis

There are four major ways that this current pandemic induced recession differs from the Great Financial Crisis of 2008/2009. The first is this recession was indeed caused by a pandemic lockdown. Essentially putting the global economy into a coma in order to try to flatten the curve. The spread of COVID-19. That contrasts with the Great Financial Crisis where the recession was really caused by a debt and banking crisis. 

Heading into the 2001 recession, US total household debt to GDP was 70%. And household mortgage debt to GDP was 47%. Then we had a housing bubble. Total household debt to GDP peaked at 98.1% in the summer of 2008. An increase of 28 percentage points. Household mortgage debt to GDP peaked at 73% compared to 47% 6 or 7 years earlier. Then we had the crisis and we’ve had a debt gauge where debt levels have been paid down. At the end of Q1 2020 household debt to GDP was down to 76% compared to its peak of 98%. And mortgage debt to GDP is at 49%, close to where it was in 2001. 

Households were better prepared as we entered into this recession by having more savings and lower debt levels. Banks were also better prepared. In episode 305 “Are Banks Safe?” We explored how banks are much less leveraged and have a much greater capital buffer than they did prior to the Great Financial Crisis. Banks are much better prepared this recession than they were for the Great Financial Crisis. Regulations are more stringent and so we’re not having a debt and banking crisis. 

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