“If you believe it will work out, you’ll see opportunities. If you believe it won’t, you will see obstacles.” ~ Wayne Dyer
Question: There’s been a great deal of talk about the shape of the economic recovery. Do you think it will look more like a U, V, or W?
Answer: It’s nearly impossible to recall a time when the macroeconomic outlook has been more ambiguous. The shape of the economic recovery appears to be equally uncertain. The Coronavirus, or COVID-19 as it is more commonly known, has placed extremely disruptive force on normal economic activity. Consumer behavior and corporate performance are typically the drivers of any broad recovery. Let’s take a look at the broad definitions for these various recovery shapes.
Any recovery will not likely fit exactly into the shape of our Roman alphabet letters: U, V, and W just represent easy ways to think about and visualize potential recoveries. As a starting point, the classic recovery is generally “U” shaped in nature whereby corporate earnings take approximately 3 years to recover after the start of a recession. Since we all know that this situation is anything but typical, conversation has begun to include potential “U” and “W” concepts.
A U-shaped recovery could indicate that current events bring us into a deep recession, and would depend on therapeutic solutions to address COVID-19 concerns. In this situation, earnings would likely be expected to recover gradually as anticipation of a vaccine grows, allowing more typical consumer behavior to return. In this scenario, the global economy could gradually heal and contribute to earnings in select areas.
The vision of a V-shaped economic recovery would likely be based upon economic activity responding strongly and favorably to therapeutic treatments, a miracle mutation, or vaccine progress. This could cause virus–related fear and angst to potentially subside possibly causing consumer behavior to return to normal as the year progresses. Employment could hypothetically rise in a meaningful way, and earnings may return to previous levels.
The W-shaped recovery suggests that the world has changed for a long period of time. Economies and businesses might open up and shut down periodically, therapeutics become increasingly less effective, vaccines are more difficult to develop, and the economic recovery is much longer than typical, with certain activities that we now consider short term become the next normal. Examples are telemedicine, greater use of videoconferences for business meetings and increases in take-out dining options.
To further the use of letters in the alphabet, we can include S, I, F, and T. At the moment, it appears that the reopening of the economy is going better than expected, with certain exceptions of course. Several of potentially remaining risks can be classified using the SIFT acronym as follows:
- Shutdowns if the virus spread increases.
- Inflation resulting from an overheated economy. The fiscal/monetary stimulus support could have the potential to fuel a hot push of prices at the same time supply is ramping up after being curtailed during shutdowns.
- Fiscal tapering could create a deflationary cycle and contribute to recessionary impact. Fiscal and monetary spending provides a safety-net and if reduced, could influence liquidity and behavior.
- Taxes are likely to increase rather than stay flat or decline.
So, there you have it, a market outlook in seven letters: U, V, W, S, I, F, T. The first phase of the economic response to the global pandemic known as COVID-19 happened quickly. It appears that the following phases will be a bit more drawn out and could be more volatile. During Phase One, we were caught by surprise like the proverbial deer–in-the-headlights. Phase Two occurred when the emergency monetary response team responded by providing financial liquidity. We’re now in the midst of Phase Three with a fiscal response which may take a bit longer to show its full effect. Phase Four and beyond will evolve as we SIFT through the results to C how resilient we R.
Liquidity and capital are readily available allowing supply chains to ramp up inventory ahead of the expected recovery in demand. It’s likely that the concept of just-in-time (JIT) delivery is less popular going forward due to expected supply chain changes and recent shortages of specific goods.
COVID-19 shut-down non-essential businesses and much economic activity with a major impact on free markets. With Governments’ attempts at pumping money into economies could result in increased debt for businesses, consumers, the public sector, central banks along with select government support. There is no way of knowing how long the process of this current phase will last due to the mysterious nature of COVID-19 and other unknowns such as the Presidential Election this November. Mind your Ps and Qs while staying focused and investing accordingly.
Past performance may not be indicative of future results. There is no assurance these trends will continue. All investments are subject to risk. The opinions expressed are those of the writer as of June 14, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. There is no assurance that any investment strategy will be successful. Asset allocation does not guarantee a profit nor protect against loss. Information obtained from outside sources is believed to be reliable but cannot be guaranteed as such.
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