Markets In The Corona Virus Crisis - Two Swans Concluded

This week we conclude our comparison of the markets during the Covid-19 crisis with the markets during the 2008 financial crisis by focusing on the trends of the last decade that helped Wall Street in 2020.

Mahmut Karayel


This is the last of our series in comparing the markets during the COVID-19 crisis to the markets during the financial crisis of 2008.

S&P500 index closed at a record high last week. It took less than six months for the stock market to fully recover and start breaking records again. Whereas after the financial crisis of 2008, we had to wait four years for the next record close. The record close in October 2007 was broken in March of 2013. Equity owners were much more scared back then. Why?

Let us look at some overall trends in wealth and ownership in the US:

2008 Financial Crisis 2020 Covid-19 Crisis
Percent of the Stock Market owned by the top 10% 77% 87%
Home ownership Rate 68% 65%
Change in home values during the 18 months starting 1 year prior -18% 8%
Change in Value of the S&P 500 index -37% 3%

Both crises caused enormous human hardship in terms of job loss; and during Covid-19 there is also great worry about health and well-being. Nevertheless, both the real estate prices and the stock markets held up surprisingly well in 2020. But during the financial crises a great portion of the population also lost their real estate assets. It is reasonable to assume that homeownership is correlated with stock ownership and when people lose home value, there is fear and flight to safety.

A mega trend is the continued increase of income inequality. This results in only a small portion of the population participating in the stock market in any meaningful way. The overall suffering is not reflected in the stock market because of the small portion of the population who particiapte in equity investing. The main street and wall street moved farther apart.

Second, the advances in digital economy made it possible for many white color workers to continue to work from home. This would not have been possible in 2008. Hence, although the health crisis is managed poorly by the administration, above average earning professions continued to function online. On the other hand, location specific workers have suffered terribly.

Lastly, digital economy also made trading for very small investor possible. This puts a floor on how low stocks go. The 13% of the market owned by the remaining 90% of the population is full of active traders. Trading of fractional shares with no transaction cost encourages active trading and puts a floor on the market. It costed $8 to do a trade in 2008, whereas now most trading is done free of transaction cost.

All of these factors,

  • the widespread homeownership and real estate continuing to gain value in 2020,
  • worsening income inequality and the low percentage of population owning most of the stock market, and
  • the digitization of a great portions of the economy which made it possible to work from home,

mitigated a stock market crash during the Covid-19 crisis, even when the economy of the main street is suffering immensely.

Please share your thoughts in the comments section.

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