Last week marked the 10th anniversary of the bankruptcy of Lehman Brothers, the largest bankruptcy in U.S. history, and the unofficial transition from just a “regular” crisis to the Global Financial Crisis (GFC). While much has changed in the U.S. economy and capital markets since 2008, much still remains the same. This letter will provide an overview of the past 10 years and the challenges the U.S. still faces.
On September 15, 2008, Lehman Brothers filed for bankruptcy, preceded by the nationalization of British bank, Northern Rock (Feb-2008), and the takeover of Bear Stearns by JP Morgan (Mar-2008). The failure of Lehman was just one event, albeit a major event, in what is considered to be the worst financial crisis since the Great Depression. The “Great Recession” of 2007-2009 caused an immense loss of household wealth, jobs, and faith in the economy with the S&P 500 down 55% (peak to trough), 8.7 million jobs lost, and a 6% increase in the unemployment rate.
Capital Markets
During 2007-2009, most visible and shocking to many was the precipitous decline in stock markets. From a high in Oct-2007 to the low in Mar-2009, the S&P 500 Index fell over 57% along with major declines across other global stock markets. In addition to the stock market declines, the deterioration in real estate prices with a 32% drop in the Case-Shiller Housing Price Index, contributed to the devastating impact on the wealth of U.S. households, with $16 million of wealth lost during the crisis as estimated by the Federal Reserve Bank of St. Louis.
Exhibit A: Stock, Bond, and Real Estate Returns Since 2007 (indexed to 100)
Since the conclusion of the GFC, broad recoveries have been seen across almost all asset classes. The S&P 500 Index is up over 330% since early 2009 and real estate has rebounded 50% since the lows. However, impacts still remain, most strikingly with interest rates still well below historical averages. Depressed interest rates are still impacting savers and those who rely on interest income to meet their living expenses. Unlike previous recessions, 10 years later we are still waiting on interest rates to normalize.
Exhibit B: Interest Rates Since 2007
Economy
Since the conclusion of the Global Financial Crisis, Gross Domestic Product, employment, and personal incomes have all rebound significantly.
Exhibit C: Real Gross Domestic Product Since 2007
Exhibit D: Median Household Income Since 2007
Exhibit E: Total Non-farm Employment and the Unemployment Rate Since 2007
By most measures, we’ve recovered what was lost in the Crisis and then some. However, the positive rebound in many economic indicators hides the impact and disenchantment felt by many. One can draw connections between the uneven beneficiaries of the recovery and the rising popularity of populism in the United States, strongly reflected by the election of President Trump in 2016.
While the rebound in the stock market has boosted wealth for upper-income households, many lower-income households have not benefited. In a recent pool by Gallup, they found only 21% of households earning $30,000 or less own stocks. Additionally, while wealth has grown for many over the past 10 years, real incomes have stayed relatively flat with an average annual increase of only 0.7% since 2008.
Exhibit F: Real Average Hourly Earning Change Year-over-year Since 2007 (non-supervision roles)
Conclusion
For many, the Global Financial Crisis feels like it just happened yesterday. However, much has changed in the past 10 years and time has generally erased the scars created in 2007-2009. From capital markets to the economy, most indicators point to a recovered and improved economy. As with most recessions though, the recovery has tended to benefit those who entered and exited the recession with higher incomes and existing household wealth. Those without, have struggled more to regain solid footing. Going forward, we’ll see if the continued economic and corporate growth can be shared across all stakeholders in our economy, including investors, consumers, suppliers, and employees.
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