Why We Can't Forecast 2021's Market Trends by Looking At 2008's Recovery Curve

The following is a contributed article from a content partner of Benzinga

As it became evident during the early months of 2020 that the world was facing the outbreak of a new and unknown deadly virus, investors started to get spooked. Things quickly came to a head around March 9, the week that the WHO declared that the outbreak was a pandemic, and the markets went into freefall.

The Dow recorded its sharpest drop in over a century, losing 19.3% in the space of just a few days.

Investor fears in March mainly came down to the prospect of a looming global recession. The events of 2008, the last big crash, are still relatively fresh in the collective memory, and we all know how that turned out. For the next half a decade after the global financial crisis, governments clamped down hard on public spending, which had inevitable economic, social and political ramifications.

However, the rest of 2020 didn’t quite play out as many had feared.

By the end of the year, most major indices were higher than they had been immediately preceding the drop, with the Dow trading 1,500 points higher in December than in February 2020. 

What’s the Reason for the Different Market Reactions?

So why has the pandemic turned out so differently for the global markets than the 2008 crisis? Several reasons could account for the variation in response. Firstly, the situation in 2008 was purely a financial crunch, whereas the March 2020 crash was the economic panic ensuing from a health emergency.

The momentum of events is also a factor to be considered. The crash of 2008 was a burst-bubble effect resulting from the collapse of Lehman Brothers and Northern Rock after years of reckless lending. It happened as a consequence of previous circumstances that had quietly been doing damage for years.

In contrast, the 2020 crash took place at the beginning of the health crisis in fear of what might happen next. Once it became clear that we were all buckling in for a long ride, the markets had ample opportunity to regroup and recover. Although the pandemic has had devastating effects on particular sectors such as travel and hospitality, others, including tech, ecommerce, and healthcare, have actually thrived.

Furthermore, government spending hasn’t dried up like it did in 2008. On the contrary, governments have been spending lavishly in an attempt to offset the negative economic impact of the pandemic for those worst affected. 

Startup Funding Underscores Spending Trends

There’s also significant evidence from other market trends to underscore the theory that 2008 doesn’t offer many precedents for how the events of the pandemic are playing out.

I recently saw a compelling data analysis piece that Sisense’s business intelligence team had assisted with for the Crunchbase blog, which demonstrated how startup funding is following a similar pattern to the stock markets.

The data showed that in terms of the number of funding rounds and the total value raised, funding increased after the Covid-19 stock market panic compared to before but decreased post-2008 crisis.

I reached out to Sisense’s team for more details, and they provided me with the charts shown here. As you can see, post-2008, investors were far more keen to invest in early-stage startups but significantly more reluctant to put funding into late-stage startups. 

However, by 2020, funding increased across the board, relatively quickly after the March stock market crash, suggesting that investors regained trust in the economy. 

The Crunchbase piece underscored the same trends we see in the stock markets – investors are happy to back promising companies in those industries that are proving robust in the face of the pandemic. 

A Recession-Proof Asset Class?

As an interesting aside, another notable contrast between these two charts is the sheer extent of growth in startup funding between 2008 and 2020. Total funding pre- and post-crash in 2008 amounted to $178.3 million, compared with 2020, which saw over $9.4 billion in transactions.

In the period intervening 2008 and 2020, we’ve seen the meteoric growth of unicorn startups like Uber UBER, Airbnb ABNB, Robinhood, Instacart and Revolut.

Added to this, already-established tech firms such as Amazon AMZN, Facebook FB, Apple AAPL and Google GOOGL have cemented their positions as market leaders in the last decade. The growth in funding simply reflects the emergence of tech startups as an increasingly attractive investment class, perhaps even one that could withstand further market turmoil in the years to come.

Turning back to the question of what to expect, does it seem likely that the markets will continue to prove resilient in the face of further virus-induced turbulence in 2021? It’s hard to say. However, there’s already speculation that governments have learned the hard lessons of years of austerity measures. It seems hopeful that we could expect to see them shouldering more long-term debt rather than introducing deep – and deeply unpopular – spending cuts.

For investors, the overall message is that looking to 2008 for predictions about what to expect from the rest of the pandemic is probably not useful. In fact, 2020 is a more helpful blueprint at this stage. We now know which industries and companies are best positioned to withstand and even overcome the challenges of the current crisis.

There are also other pressing challenges, such as climate change, that will stimulate innovation and, in turn, investment. The best opportunities will come from those companies willing and able to address the macro issues of these challenging times.