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Exploring Today's Macroeconomic Parallels to 2001

By: Gridline Team | Published: 12/01/2022
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Est. Reading Time:
3 minutes

In any downturn, analysts and commentators search for historical parallels to explain what is happening and to predict what will come next. The problem is that although there are often similarities, each downturn is also unique, so the analogies are never perfect.

The COVID-19 crash illustrated this, as it was the first recession ever caused by intentionally locking down the economy. However, today's downturn is more like the dot-com crash than any other. Both were driven by tightening financial conditions with a slowdown in earnings and labor market weakness following. In both cases, inflation remained stubbornly high.

Investors with a long-term view should heed the lessons of the 2000s. Rather than stage a dramatic V-shaped recovery, the economy underwent a long slog with fits and starts. During the "lost decade" for stocks, investors who held on to their public market portfolios saw them lose value in real terms. 

In contrast, private equity and venture capital firms thrived, with annualized average returns of 7.5%, by buying up businesses at bargain prices and waiting for better times.

Poor stock returns ahead

In early 2000, forward-looking macro indicators were already signaling that a recession was coming. It's the same today. The yield curve inverted, and leading indicators such as the credit impulse and purchasing manufacturing indices have been weakening for months. The Conference Board's index of CEO confidence has also been plunging.

Moreover, the economic expansion that began in 2009 was the longest on record, and expansions don't die of old age. They are usually killed by central bank tightening or exogenous shocks, which The Fed is now delivering.

By the end of 2000, EPS growth had turned hostile, and the stock market had peaked. The same is happening today. EPS growth for the S&P 500 peaked in Q4 of last year and has been declining. The stock market hit its high in December 2021 and has been in a bear market for months.

A long, slow recovery

The labor market was slow to recover from the dot-com crash. It took until 2004 for the unemployment rate to begin to recover meaningfully.

The major caveat (that the whole world is holding its breath for) is that dovish Fed policy, or the famous "pivot" narrative, may prevent a long, drawn-out economic recovery this time. 

While some Fed members have signaled dovishness, the central bank has yet to cut rates or resume asset purchases. More importantly, Powell has said that “it is very premature to be thinking about pausing” rate hikes. While the market has staged multiple significant bear market rallies this year, it appears that Powell & co. are in no mood to support asset prices with more stimulus.

In no uncertain terms, Powell has repeatedly said that the Fed will not be bailing out investors this time. So, the market will have to find its bottom, which could mean more pain ahead.

In any case, private and public markets don't always move in lockstep, so even if the Fed cuts rates or resumes asset purchases, that doesn't mean stocks will automatically rebound. As we saw in the lost decades of the 1970s, 2000s, and in the decades ending in 1858 and 1940, stocks don't always go up.

Many factors again support a faster, more robust recovery for private markets. Private equity is still holding on to trillions of dollars in dry powder, waiting to be deployed. In addition, there is a lot of "pent-up demand" for private markets investing, as many institutional investors have been hesitant to put money to work.

Even the slightest signs of stability or a rebound in the economy could lead to a mad dash for private assets, driving up prices and returns. So, although the public markets may take many years to recover, the same may not be accurate for private markets.

This is where Gridline comes in. Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds. It enables individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.

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