• Thoughts on the Market

3 Reasons Why a 2020 Recovery May Be Different

With Mike Wilson U.S. Equities Research for Investors

Although the coronavirus recession shares traits with the 2008 financial crisis and other recessions, the rate and sustainability of a recovery could be quite different this cycle.

Each week, Mike Wilson offers his perspective on the forces shaping the markets and how to separate the signal from the noise. Listen to his most recent episode and check out those of his colleagues from across Morgan Stanley Research.

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Current Episode Transcript

Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, May 26, at 11:30 a.m. in New York. So let's get after it.

Economies move in cycles. However, these cycles only matter for financial markets at turning points because most of the time the economy is in an expansion phase. Such turning points include periods when growth accelerates or decelerates, but the economy is still expanding. Economic recessions are different, however. These are periods when growth is actually negative and the economy is shrinking. Recessions are also rare, occurring just once per decade in the US.

Therefore, it makes sense that a good part of our investment strategy research centers around cycle analysis. We find it very useful and profitable when properly interpreted. As discussed over the past few months, when it becomes obvious to everyone we're entering an economic recession that usually marks the end, rather than the beginning, of the bear market. In fact, we've shown in our research just how similar this cycle has been to prior recessions with respect to financial markets.

Of course, all economic cycles are unique in some way too, which can affect the rate and sustainability of the recovery while also determining both new opportunities and areas ripe for disappointment. With respect to this recession, we think the primary differentiating feature is the nature of the exogenous shock that triggered it. The pandemic provides a faceless villain that everyone wants to defeat but can't really punish for our economic hardship. In short, there are no bad actors in this recession. This has liberated policymakers to do whatever it takes, both on a monetary and fiscal front, and that is what's very different this time when thinking about the recovery.

More specifically, after the Great Financial Crisis recession of 2008, we got unprecedented monetary policy support with central banks introducing quantitative easing, or QE. To the average person, QE is better known as "money printing." However, these QE programs were uncoordinated at first, with the U.S. initiating its QE program in late 2008, while Japan and Europe waited several years. This time, all three major central banks are printing money at the same time, with the Fed printing more money in this current program than they did in the following three years after the financial crisis.

We're also getting fiscal support this time. After the financial crisis, many governments practiced fiscal austerity, whereas this time we are seeing record setting fiscal deficits led by the US. This coordinated policy mix has led to much faster growth in the money supply. And money supply is a function of both the amount of money on the Fed's balance sheet and the velocity of money in the real economy. This money is flowing into asset prices, but it's also flowing into the real economy. And it's just one more reason why we will likely remain more optimistic on both the rate and sustainability of the recovery. It also means we will continue to suggest investors look for more cyclical stocks as they add equity risk to their portfolios.

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