Since shutting down a large portion of our economy in response to Coronavirus, economists and investors have debated the type of recovery we can expect. The topic sounds arcane, but it can impact the type of investments that will do well or poorly. Following are five separate possibilities, with recovery further away as you move down the list.
V – In a V-shaped recession, the economy suffers a sharp economic contraction, but recovers quickly. It was widely expected that a nationwide quarantine limiting business to essential services would have a dramatic impact on company revenues and drop economic activity sharply. Conversely, it was hoped that once we ‘flattened the curve’, we could return to work and economic growth could resume as rapidly as mid/late-summer. However, as restrictions were lifted, not everyone followed that script, making their own decisions about when to eat out again, when to shop, and how they will reengage with a different world.
U – As a result, more observers and economists are debating a U-shaped recovery, which is what we experienced in 2008-09. In a U-shaped recovery, the economy does not bounce back right way. Rather, it spends a few quarters slogging along before working its way upward. The Great Recession of 2008 and 2009 lasted for 18 months, the longest period of economic decline since World War II. In April 2020, 60% of CEO’s surveyed by a global association of chief executives said they were planning for a U-shaped recovery from the current recession. At this point, markets are pricing in a recovery that is somewhere between V and U-shaped.
✔– A check, or swoosh, is also gaining credibility. This outlook reflects the sharp downdraft of the V and U shapes but gives greater weight to the slower nature with how we change habits. When quarantine began, it was a difficult adjustment for many in terms of changing daily patterns. Some found themselves without work or were working from home. As the weeks passed, routines were fine-tuned to find efficiency or motivation under the new rules. Exiting quarantine there was a rush of activity to release pent up consumer demand for any number of needs, but this will be tempered by the reestablishment of new habits and routines to address a spike in COVID-19 cases and will moderate the expansion for a bit. This reflects our current view.
√– Analysts who may be fans of math are considering an economic path symbolized by the square-root sign. The term was first used in 2009, just after the stock market bottomed in March. One investor thought that we would experience a bounce off the bottom and settle into a prolonged period of subpar growth, or a lasting slowdown. This thinking suggests it could take some time for an expanding economy to reach the same threshold as before Coronavirus quarantine.
L – The most harmful type of recession, an L-shaped recovery reflects the least optimistic view and reflects a permanent impact on GDP with little hope for recovery. Lost investment and productivity slowdowns cause GDP to be less than it would otherwise be.