Why we’re not expecting a repeat of the 2008 financial crisis

Executive summary:

The overall systemic risk to financial markets from stresses in the banking sector appears contained, making a repeat of the 2008 crisis unlikely
Many global central banks reaffirmed their commitment to taming inflation by announcing additional rate increases
A recession appears likely in 12-18 months in many developed countries, including the U.S.

On the latest edition of Market Week in Review, Investment Strategy Analyst BeiChen Lin and ESG and Active Ownership Analyst Zoe Warganz discussed recent stresses in the banking sector as well as the latest rate increases from global central banks. They also provided an update on the outlook for markets and economies in the months ahead, including the chances for a recession.

Stresses in banking sector unlikely to spark financial meltdown

Warganz and Lin kicked off the segment with a look at the latest developments in the global banking system, which has come under strain due to the collapse of Silicon Valley Bank (SVB) and Signature Bank and the struggles of Credit Suisse. Lin noted that this has resulted in ongoing volatility in the banking sector, with some banks, including First Republic in the U.S., exploring a range of potential options to boost their liquidity.

Another interesting development has been the issuance of strong statements from regulators worldwide pertaining to lessons learned from the recent turmoil as well as potential actions that might be taken down the line, he said. For instance, on 23 March, the Switzerland based Basel Committee on Banking Supervision, the global standard-setting organisation for banking sector regulations, issued a statement emphasising that it will be looking for lessons learned from the recent turmoil, he said. "The committee also noted that it will be thinking about what types of additional banking standards may need to be enacted to prevent bank failures going forward," Lin explained.

He emphasised, however, that the overall systemic risk to financial markets from stresses in the banking sector appears contained. "At Russell Investments, we are not expecting a repeat of the 2008 financial crisis," Lin stated.

ECB, Fed and BoE move forward with rate hikes

The conversation shifted to global central banks, which Lin noted have been facing a difficult dilemma for some time. Over the past year, they've been trying to contain inflationary pressures by raising interest rates, he said, explaining that doing so can constrain economic growth and also trigger market instability. "When this happens, central banks have to decide whether to continue hiking rates to tame inflation, or to hit pause on rate increases in order to assess the situation and see how markets respond," Lin stated. At the end of the day, central bankers don't want to inadvertently tip the economy into a recession, he remarked.

Lin said that in light of the banking crisis, central banks around the world have been forced to grapple with this decision in recent weeks. "Ultimately, many have decided that for now, inflation fighting still remains their number one priority," he stated. Case in point: The European Central Bank lifted borrowing costs by 50 basis points (bps) on 16 March, while the U.S. Federal Reserve and Bank of England both increased rates by 25 bps the week of 20 March, he said. In addition, the Swiss National Bank announced a 50 bps hike on 23 March, Lin said.

These moves are clearly sending a strong message to markets and investors that central banks are committed to bringing inflation back down to its target levels, he noted. At the same time, however, central bankers are stressing that future alterations to monetary policy will depend on the latest data as well as ongoing market dynamics, Lin said.

Recession outlook: When could the next economic downturn strike?

Lin wrapped up the segment by recapping some of the key takeaways from Russell Investments' just released Q2 2023 Global Market Outlook. He said that he and the team of investment strategists believe that a mild to moderate recession will probably strike within the next 12 to 18 months in many developed countries around the world, including the U.S.

Lin stressed, however, that the team is not expecting the next recession to be a repeat of the Great Recession of 2008-09. "Regulators have learned a lot of lessons from what took place back then, and banks are now more prudent with their lending standards. In addition, consumer and corporate balance sheets particularly in the U.S. still look generally resilient. I believe that all of these factors, taken together, should help limit the severity of the next recession," he stated.

Lin finished by noting that even though recessions can be painful, it's important for investors not to panic. Staying calm, having a plan and sticking to their strategic asset allocations are important steps that will likely help investors weather the next economic storm, he stated.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.