8 BARRON’S April 6, 2020
ments have provided, Reid concludes.
The similarity to past cataclysmsis even
more striking when you consider that it
was just in February that the U.S. economy
was cruising along with unemployment at a
half-century low of 3.5% and the stock mar-
ket at record highs, with the S&P 500 one-
third higher than where it ended Thursday.
The U.S. economy will come crashing
down at a 30% annual rate in the current
quarter, according to the most-dire esti-
mates, as a result of deliberate actions to
counter the pandemic and not a war or nat-
ural disaster or the popping of a bubble, as
with the housing crash in 2007-08 or the
dot-com mania at the turn of the century.
The question, then, is: How much of a
guide does history provide about an even-
tual recovery? In particular, when recov-
ery does arrive, will the majority of con-
sumers who avoided the worst effects by
remaining well and keeping their jobs be-
come more circumspect about debt, a
trend that began after the financial crisis?
As for stocks, past bear markets might
provide some guidance about what might be
expected. David Rosenberg, founder of
Rosenberg Research, looked back at the
bears since the Great Depression. “In mar-
kets, as in life, the higher you are, the harder
the fall. It’s also never about historical per-
cent changes, cycle by cycle, but the reversal
from the prior market condition,” he writes
in his Breakfast with Dave missive.
On average, 83% of the prior bull mar-
kets’ gains were given back in the subse-
quent bear stretch. The median retrace-
ment in 10 market cycles going back to the
1928-29 peak was 69%. Based on the aver-
age retracement, the S&P 500 cycle low
would be 1135, while the median would peg
the low at 1515, compared with Thursday’s
close of 2526.
Since World War II, the average bear-
market reversal has been 71%; the median,
54%. That would put the S&P 500 at 1455 in
an average retracement and 1798 in a median
one. There’s a 20% chance the lows are in,
“but it’s more likely the bottom to be picked
is somewhere between 1500 and 1800 on
the S&P 500,” Rosenberg concludes.
How might this time be different? As
noted, the fiscal and monetary responses
have been unprecedented. The Fed, for the
first time, is buying corporate bonds. Other
central banks have moved into buying equi-
ties. And while the odds are stacked against
the Fed stretching from purchasing corpo-
rate debt to buying stocks, the only lesson
of recent history is never say never.B
email: [email protected]churlish to mention the roughly $10 trillion
in stock-market wealth vaporized since the
February highs, by Wilshire Associates’
calculations. Those losses, along with proba-
ble dividend cuts, are likely to be a further
drag on spending.
We really are all in this together.
T
his is shaping up to be the worst
economic downturn in history,
according to many estimates.
But history stretches much far-
ther than most economic data series,
which typically begin after World War II.
Jim Reid, strategist for Deutsche Bank,
looked way back in a note entitled “
Years of Large Economic Contractions,”
which I find more interesting these days
than binge-watching Netflix sagas about
sociopaths who keep big cats.
Delving into the Bank of England’s re-
cords dating from the 13th century, Reid
found ample precedent for the current
crisis. Many of the biggest economic con-
tractions came during pandemics, with the
Black Death of 1349 resulting in a 23.5%
decline in England’s economy, the second-
worst on record. (No. 1 was the 25.4%
plunge in 1629, which the Financial Times
helpfully explains was when King Charles
I dissolved Parliament, following financial
difficulties stemming from the “disastrous”
war with Spain. Now you know.)
Looking at more modern history since
1900, the 6.5% decline that Deutsche
Bank’s economists forecast for the U.K.
economy this year would be the third-big-
gest after those in 1919 and 1921, and
would surpass by more than half 2009’s
4.2% drop after the financial crisis.
As for the U.S., its worst years came in
the 20th century—the 12.9% contraction in
1932, atthe depth of the Great Depression,
and the 11.6% downturn in 1946, following
World War II, with the transition to a
peacetime economy. The bank’s econo-
mists’ estimate of a 4.2% annual decline in
gross domestic product in 2020 would
rank as the 18th worst since 1790 and the
ninth largest since 1900.
In continental Europe, the two world
wars have accounted for the biggest con-
tractions in France, Italy, and Germany,
along with the hyperinflation of 1923 in
Germany. That country’s economy shrank
by more than half in 1946, while Japan’s
contracted by slightly less than half in 1945.
The contraction from the coronavirus
this year is likely to rank among the 10
worst for many countries. That’s remark-
able, given the unprecedented size of the
monetary and fiscal stimulus that govern-
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