However, the massive government response, both monetary and fiscal, is already showing signs of stabilizing markets and consumer and business confidence. It is expected that this black swan event could reduce U.S. gross domestic product (GDP) by up to 15% over the near term. However, the combined government responses may be equivalent to this loss in economic activity. Furthermore, additional government support is being considered and will probably come to fruition.
Although economic statistics, corporate earnings and other critical data will be of limited value in the near term, investors can look at prior periods of severe economic and market crisis to gain some insight as to possible outcomes.
The best historical precedent we have is the Great Financial Crisis (GFC) of 2008. At the time, it was considered the greatest challenge since the Great Depression. Similar to the current crisis, very novel and bold government initiatives were taken to salvage the economy and the markets. It is instructive to track how the market is behaving since the start of the coronavirus crisis relative to how the market behaved during the GFC.
As the chart below shows, although the current crisis has been relatively short, there are real similarities. Longer term the initiatives taken during the GFC, although controversial, were ultimately effective. The economy went on a historically long expansion, and investors in risk assets of all types enjoyed extremely attractive returns.