Today, the stock market is discounting the so-called "V-shaped recovery": the economy undergoes a sharp contraction for one or two quarters, but quickly manages to recover and go back to the starting point.
Some will think that this it is a too optimistic scenario. What we can infer after the drops in the indices over the past few sessions is that there is some suspicion that the " V-shaped recovery" may not occur as quickly as the market expects. Markets are beginning to fear the economic consequences of a second virus outbreak.
Confección del gráfico: Fathom Consulting.
As we see in the graph, during the Great Recession the stock market was falling during more than a year and a half.
It is important to remark that the causes of this crisis were different from the current one. During the Great Recession, excessive debt and the bursting of the bubble in the real estate market shocked the roots of the financial system. Financial institutions assumed a disproportionate risk to its solvency.
On the other hand, the Covid-19 crisis is what we could call a “textbook crisis": an external shock to the economy that generates a supply crisis (companies are forced to close). Another example would be wars or natural disasters. Although, unlike a war or disaster, nothing has been destroyed in this crisis.
And, even though there is no manual to overcome crises, everything seems to point that the 2007 crisis was more severe in terms of complexity when compared to the current one.
Due to the natural nature of the crisis, it is probable that the economic consequences of the Covid-19 crisis are going to be be less severe and prolonged than those of the Great Recession of 2008, as long as new virus outbreaks are controlled and treatments and vaccines are found effective as soon as possible. Hopefully, this will be the scenario in which we will be in a few months.
