The recent stock market turmoil has many harkening back to the similarly tumultuous period of the 2008 financial crisis.
However, the effects of the 2020 meltdown could end up being more like to a crash that took place nearly a century ago.
According to Murray Gunn, head of global research at market forecasting firm Eliott Wave International, the speed and broad decline across the entire market from all-time highs just over a months ago is “more analogous” to the Wall Street Crash in 1929.
This was an era-defining event that precipitated a sustained period of global economic decline and record unemployment known as the Great Depression.
Gunn reckons the initial crash is “the first wave of a three-wave process”, which will see a short-lived bounce in markets followed by a longer period of decline akin to the early 1930s.
“Confidence [in the market] has evaporated…the world economy has stopped and the velocity of money has halted. That is why central banks are providing so much liquidity as they think this will help avert a catastrophic economic crash”, Murray said.
However, the analyst said even the unlimited quantitative easing offered by central banks such as the Federal Reserve will not be enough to overcome the damage inflicted on the market by the meltdown.
“The psychology behind the money stopping is not one that can easily be brought back…you get to a stage when a deflationary process starts to tumble into a spiral,” he said.
“We don’t see this as a V-shaped recovery at all…history does not repeat but it rhymes.”
Cash is king
With a Depression-type era seemingly looming, Murray says that going forward, companies and sectors with strong cash balances will be the prime target for investors willing to take the risk in the market, while firms with high levels of indebtedness are likely to be eschewed as too risky.
“This is the start of the great debt deflation…indebted entities will find it extremely hard to survive, and the need for cash and the need for income will be the overriding objective for [investors] for the next few years”, he added.
While not advising investors directly, Murray says that large tech firms are among those with large cash piles that buyers may be looking to park their money in through the coming depression cycle.
On the flip side, industries dominated by multinationals with large debts (such as the oil and gas sector) are likely to struggle to attract interest.
“The focus will be on who is solvent and whose got the cash….we think that highly indebted companies will be the ones to avoid, without a shadow of a doubt,” Murray said.