Deciding whether the recovery is V, U, W or any other shape may depend on where you look and may not matter much for the markets
Is the nascent economic recovery V-shaped, U-shaped, L-shaped, W-shaped, square root-shaped, Nike swoosh-shaped or something else entirely? I haven’t seen this much debate over what we perceive since we disputed whether the dress was blue and black or white and gold. For what it’s worth, I insist that the dress is blue and gold and the auditory illusion says “Yanny,” not “Laurel,” but I digress.
The reality is that where you stand on the topic depends, as with most other things, on where you sit. If you’re in the V-shaped recovery camp, then there are data to confirm your bias. For example, survey data in the manufacturing and/or service sectors in China and the New York tri-state area, two places where the COVID-19 caseload has been largely compressed, have staged, well, V-shaped recoveries.1 Even US retail sales appear to be quickly retracing to prior levels, the tens of millions unemployed notwithstanding.2 The S&P 500 Index and Nasdaq Composite Index have, to date, followed a similar pattern.3
Lest the V-shaped folks take a victory lap, there are data sets to bolster the supporters of economic recoveries of all shapes and sizes. For example, the recovery in air travel and restaurant seating is U-shaped; in continuing jobless claims, it’s backward square root-shaped.4 US Treasury rates, for their part, suggest that the recovery may be L-shaped.5 The recent rise in COVID-19 cases6 has some predicting another round of draconian shutdowns and a subsequent W-shaped recovery.
Perhaps everyone is overthinking this. Consider that the economic recoveries from the recessions beginning in 1981, 2001, and 2007 each had very distinct shapes, ranging from V-shaped (2001), to W-shaped (1981), to U-shaped (2007).7 The broad markets posted sound peak-to-trough annualized returns in all three scenarios. Paradoxically, markets ultimately performed best in the U-shaped scenario and worst in the V-shaped scenario.8 Admittedly, three examples may not amount to sound statistical analysis. However, it is intuitive that weak recoveries with persistently low inflation and unending policy accommodations would be generally better for financial markets than sharp recoveries and tighter monetary policy. For the record, I believe we will continue to see slow growth and have an extended zero-interest-rate environment, and I expect that could set the stage for another long market cycle.
So, let’s stop obsessing over whether it’s a V-shaped recovery. As with the blue and black/white and gold dress, it all depends on the context in which you are observing. The reality is that modern history suggests the markets are not as concerned nearly as much as everyone else seems to be.
Brian Levitt is a Global Market Strategist at Invesco.
^1 Sources: China Federation of Logistics and Purchasing, May 31, 2020, Federal Reserve Bank of New York, June 2020
^2 Source: US Census Bureau, May 31, 2020
^3 Source: Bloomberg, June 22, 2020. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. Indexes are unmanaged and cannot be purchased directly by investors.
^4 Sources: Transportation Security Administration and OpenTable.com, June 22, 2020. US Department of Labor, June 6, 2020
^5 Source: Bloomberg, June 22, 2020
^6 Sources: Bloomberg, Johns Hopkins, June 23, 2020
^7 Sources: Bureau of Economic Analysis, Invesco, March 31, 2020
^8 Sources: Bloomberg, Standard & Poor’s, Invesco, June 23, 2020