economic recovery points way of the renaqissance man starring jim woods

originally published at JimWoodsInvesting.com

During the first two week of May, the big debate on Wall Street and in economic circles has been what kind of economic recovery will we see given the new paradigm of a COVID-19 world. More specifically, what is the “shape” of an economic recovery likely to look like in the months to come?

 

Will we see what market bulls, and just about everybody else in the country, is hoping to see—i.e. a so-called “V-shaped” economic recovery? Will we see a “U-shaped” recovery? Before we continue, let’s start by defining the terms a bit, so that we’re all on the same page.

 

A V-shaped recovery is one where economic activity plunges rapidly due to, in this case, the shutdown measures implemented on the global economy designed to stymie the spread of the coronavirus. And though the social distancing measures, wearing of masks, and near-nationwide shelter-in-place orders have “flattened the curve” of new virus cases in most areas, those measures also have flatlined economic activity.

 

The price action in the stock market since the lows in late March suggest there’s optimism that we will have a V-shaped recovery in the third and fourth quarters, and in 2021.

The decimation of economic activity is by far the worst we’ve seen in most of our lifetimes, and with a 14.7% unemployment rate in April and tens of thousands of businesses permanently closed, it’s easy to understand the initial half of the “V” shape in any graphic display of economic activity.

 

But what about the second half of that “V” shape? The price action in the stock market since the lows in late March suggest there’s optimism that we will have a V-shaped recovery in the third and fourth quarters, and in 2021.

 

Yet the actual numbers, and the recent comments by coronavirus medical experts and Federal Reserve Chairman Jerome Powell, suggest that we aren’t in for a V-shaped recovery, but rather a recovery that’s much more likely “U-shaped.”

 

The economy is more like a chandelier with a rheostat, and one that will take a while to dial up before we can see “normal” again.

In a speech on May 13, Chair Powell described the economy path ahead as “highly uncertain and subject to significant downside risks.” The Fed chief also said that “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

 

So basically, he’s telling us that the government is going to have to print more money to keep the economy afloat, and that things are going to be rough for some time. Now, while this shouldn’t come as much of a surprise, it is nevertheless a disconcerting thing to hear.

Want more reason to think we are in for a U-shaped recovery? Then I direct you to the latest survey of economists by The Wall Street Journal. According to the survey, “the U.S. [economic] contraction caused by efforts to contain the coronavirus will be larger than previously anticipated. The economists expect gross domestic product to shrink 6.6% this year, measured from the fourth quarter of 2019.”

 

Yet despite its challenges, hope springs eternal for the U.S. economy. The way I see it, after some two months of what amounts to a national quarantine, the natives have become restless.

Again, a contraction, i.e. a recession, of this magnitude was expected, but as more and more data come in, we will all realize just how bumpy, dangerous, and difficult to navigate the economic road ahead is likely to be.

Yet despite its challenges, hope springs eternal for the U.S. economy. The way I see it, after some two months of what amounts to a national quarantine, the natives have become restless. Americans in many states are starting to see their economies open up, and while that’s not true yet for the majority of states, it probably won’t be too much longer before a national reopen is seen.

 

That’s good news for the economy, and very much-needed good news for those 20.5 million Americans who lost their jobs last month.

 

Of course, the economy is not a light switch that can simply be flipped on and we’ll suddenly be back to full illumination. The economy is more like a chandelier with a rheostat, and one that will take a while to dial up before we can see “normal” again.

 

And though I fully expect the economy to recover, whether we spell that recovery with a “V” or with a “U” is going to be the key question. If we spell it with a V, then April’s record stock market surge of 13% on the S&P 500 will be validated.

 

If, however, we spell the economic recovery with a U, then the road ahead for equities over the next several months will be ultra-bumpy, an exceedingly uncomfortable.

In The Name Of The Best Within Us,
Jim Woods Renaissance Man

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