10 Years From the S&P’s Low in 5 Numbers

By admin_45 in Blog

We would like to continue our “10 years since the S&P lows” conversation in this section with a look at 5 economic data points that show how the last decade has developed in the wake of the Great Recession. The upcoming tin/aluminum anniversary (the traditional present for a decade of marriage, so we read) has put us in a retrospective mood…

#1: Long-term Treasury rates are lower now than pre-Crisis, in part due to a meaningful shift in inflation expectations.

• Weird fact: 10-year Treasuries had a higher yield a decade ago today than now. The yield on March 6, 2009 was 2.90%. Today’s close was 2.72%.
• In 5 years before the Great Recession, 10-year Treasury yields traded in a band of 4% to 5%. In the last 5 years (2014 – 2019), the range has been 2% to 3%.
• Part of the reason for these lower yields: inflation expectations show a noticeable drop when comparing pre- and post-Crisis data. 
  
  Breakeven levels on 10-year Treasury Inflation Protected Securities consistently implied 2.5% future inflation from 2004 to 2007. Over the last 4 years (2015 – 2019), inflation expectations have hovered between 1.5% and 2.0%. Right now, they sit at 1.95%.
• 10-year TIPS breakeven chart here: https://fred.stlouisfed.org/series/T10YIE

#2: US Federal Debt as a percent of GDP took a step function higher in the aftermath of the Great Recession and never looked back.

• At the start of the recession in Q4 2007, total US debt to GDP stood at 63%. This was actually slightly lower than its peak of 65% in 1995 and well below the trough of 54% in Q2 2001.
• By Q4 2010, Federal debt to GDP stood at 92%.
• It is now 104%, and Congressional Budget Office predictions say it will climb further.
• Chart here: https://fred.stlouisfed.org/series/GFDEGDQ188S

#3: The size of the US Federal Reserve’s balance sheet is also much larger than pre-Crisis levels.

• At the start of 2008, the Fed’s balance sheet totaled $922 billion.
• At the start of 2010 (after the first round of bond buying to stimulate the US economy), it was $2.3 trillion.
• By the start of 2015, it had grown to $4.5 trillion, reflecting the Fed’s second round of stimulus.
• The Fed’s balance sheet today: $3.9 trillion, or 4x where it was pre-Crisis and 2x the levels of exactly a decade ago.
• Chart here: https://fred.stlouisfed.org/series/WALCL

#4: While the overall US labor market is strong, the Great Recession’s impact is still visible among younger college-educated workers.

• Recent graduates (those out of school 5 years or less) typically have an edge in the labor force because of their education and lower cost to employ than an older worker. Historically (at least back to 1990), this has translated into their being hired early in an economic recovery.
• That did not happen post-Crisis. US unemployment peaked in April 2010, but recent grad unemployment topped out in March 2011. Also unlike general employment trends, recent grad unemployment actually rose in 2013.
• The latest data from the NY Fed (December 2018) shows a new anomaly: recent grad unemployment is essentially the same as the population as a whole, at 3.7% versus 3.8%. That has never happened before in the history of the data from 1990 to the present. The “recent grad” advantage appears to be gone.
• Data here: https://www.newyorkfed.org/research/college-labor-market/college-labor-market_unemployment.html

#5: Big moves in the dollar came long after the Great Recession was over.

• In March 2009, the DXY Index stood at 80.42.
• It would drop 4% by July, but then climb by 10% over the next 9 months.
• Five years on from the March 2009 equity market lows, the DXY was at 79.78, essentially unchanged (and with very little volatility) over this time span.
• The big move came from March 2014 to October 2016, with the greenback rallying 28%. It has weakened only modestly – about 5% - since then.

Summing up: some of the Great Recession’s impact was immediate, but most of it took years to play out even as equity markets began to recover. Some of these effects, such as lower long-term interest rates, are generally good for stocks whenever they occur. But most – higher Federal debt levels, large central bank balance sheets, and young grad unemployment - are new to this cycle. These risk factors – and many others we did not have space to mention – are the lasting effects of the events of 10 years ago.