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10 Years on from the Global Financial Crisis

Gresham Wealth

On the 15th September 2008, Lehman Brothers collapsed, and the chain reaction brought the global financial system to its knees. Taxpayers’ money was pumped into the system, but this was not enough to prevent loss of confidence and bring about the recession.

It’s hard to believe that we’re now some ten years on from that day. Much has changed since 2008 – both economically and politically – and thankfully we’re now in a relatively stable position.

In this article, we take a closer look at performance of the markets since 2008 and the factors that have impacted this, alongside looking at the lessons the financial crisis has taught us.

Where are we 10 years on?

The effects of the Global Financial Crisis on the global economy still linger today. Interest rates remain extremely low by historic standards and Central Banks (other than Japan) have only recently stopped Quantitative Easing. Most Western Governments are still operating austerity measures, and whilst unemployment is low, wage growth has only recently started to pick up. The continuing lack of productivity gains is also worrying.

That said, the global economy is growing, and has been for a number of years. Despite the best efforts of Donald Trump to disrupt trade and the strength of the Dollar having an upsetting effect on emerging markets, global GDP is set to grow by c. 3.9% during 2018 according to the IMF.

Market performance since 2008

If you held a portfolio of global investments during the Global Financial Crisis and held your nerve, you will likely have made quite significant capital gains. The S&P 500 (representing a pick of 500 large companies listed on the New York Stock Exchange & NASDAQ) has grown by 311% gross since the 15th September 2008.

There have been some disruptions to performance over the 10-year period, but in general terms, markets have experienced an unprecedented period of performance.

So what has driven this, given that the global economy has not exactly delivered stellar growth and productivity remains low?

The most significant contributor to the performance of stock markets since the Global Financial Crisis has been loose monetary policy.

Firstly, let’s look at conventional monetary policy. Following the Global Financial Crisis, Central Banks around the world dropped interest rates to extremely low levels (in the UK, the base rate has been at or below 0.50% pa since March 2009). What does this mean for the economy? Well, for companies and consumers, borrowing is cheap. Therefore, companies are more likely to borrow and invest in their operation in order to expand, thus restoring growth to the economy and getting people back into employment.  For consumers, they are incentivised to, first, spend their money rather than save, and second, borrow money to make large purchases whilst credit is cheap (for example, the growth in car leases over the past few years).

So, if companies can be incentivised to produce more and consumers can be incentivised to spend more, the economy is buoyed. Also, given how cheap it is to borrow, it becomes less difficult for companies to turn a profit. Profitability of many companies has further been boosted by the lack of wage growth as production costs have not experienced significant upward pressure over the 10-year period.

For investors, therefore, over the past 10 years the trade-off has been between saving in accounts attracting interest rates of around 1.00% pa or buying the shares of companies which are operating in a relatively easy and profitable environment. The lack of alternatives for those with money has, at least partially, contributed to the strong performance and relatively low volatility of stock markets.

There are of course downsides to keeping interest rates so low for such a long period, and the principal one is the lack of improvement in productivity. By keeping interest rates so low, companies don’t have to try hard to stay in business. That is, if interest rates were higher such that the cost of production for companies was higher, there would be a greater incentive for companies to produce more (or produce a better product) for each unit of input into the production process. Without that incentive, companies are quite happy to hold cash on their balance sheets and do not see a great need to invest, and that restricts technological advancement.

Let’s now move on to unconventional monetary policy; Quantitative Easing (QE). You will likely have heard of QE; it has been well talked about since the Global Financial Crisis. QE is an expansionary policy whereby Central Banks purchase financial assets in order to increase the monetary supply. The theory behind this is that, by increasing monetary supply in the economy, banks are incentivised to lend to consumers and companies, and this further supports consumption and production. Furthermore, increasing the monetary supply creates inflationary pressures in the economy, and stable inflation is important as, again, it encourages people to buy now rather than waiting until tomorrow when prices will be higher.

So QE again improves the environment for companies to operate in. What it also does, though, is inflate the prices of financial assets. By actively purchasing financial assets (such as government bonds, corporate bonds, and even shares in companies), Central Banks increase the demand for these assets and that has the effect of increasing prices (translating into Capital Growth for investors).

The same has happened in property markets. Cheap and easy credit, when combined with low returns on other assets, has made owning property for investment purposes more attractive since the Global Financial Crisis.

So what lessons can we take?

There’s no doubt that Central Banks have had a significant impact on stock markets, in particular the rate at which markets recovered following the Global Financial Crisis.

Whether that will be representative of the experience of investors after the next recession is debatable. Interest Rates are on the increase in the UK, but at a slow rate. Furthermore, the value of the financial assets currently held by Central Banks is significant.

Should we experience a downturn before rates normalise and Central Banks have been able to sell down the assets they hold, the effect that similar monetary policy measures would have would be limited at best.

There is, of course, always fiscal policy (government spending and taxation), but the focus on austerity and balancing the books doesn’t seem to be going away any time soon (despite the pressure from the left).

The impact of the next downturn for investors could be rather more drawn out than the Global Financial Crisis. However, one should remember that much has been done to reduce the systemic risks that caused the Global Financial Crisis.

If you had been advised to buy into the S&P 500 on the day after Lehman’s went under, you would probably have run a mile. However, with the benefit of hindsight, you’d now have been sitting pretty. As ever, the message is that no one has the ability to time the market. The successful investor doesn’t invest for today, tomorrow, or even next year, but invests now for the next 10 years.




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