What Could a Market Recovery Look Like?

April 13, 2020 9:28 am

Betsey A. Purinton, CFP®

Managing Partner & CIO

In hindsight, it appears surprisingly easy to shut down an economy – we just did it in a few short weeks.  I suspect it is much harder to open an economy back up again. What inspired so many Americans to shelter in place was a combination of worry for their own personal health and an altruistic desire to save others from the spread of Covid-19. Safety comes first. Before people can fully trust their social and workplace environments again, many more hard facts through testing need to be uncovered and strict procedures put into place.

We all want to see a recovery – sooner than later. But there are also concerns that we do it right, so that any future partial shutdowns can be avoided if hot spots flare up. Opening up and then shutting down parts of the economy again is not the best option, as it could delay an ultimate recovery and discourage people from being able to return to the work force.

That said, it is good to remember that while we are experiencing a truly unusual business cycle, it still is a business cycle. And business cycles follow certain patterns of troughs and peaks, with one always following the other over varying lengths of time. So, while there is a trough now, there will be another peak.

Each recovery in a business cycle, however, can look different (longer, shorter, fast or slow, high growth/low growth, etc.).  There is a lexicon of alphabet letters and characters being used to describe what could happen next in our economy. Here are a few of the ones we are focusing on.

 

Square root recovery. In this scenario pent up demand (people waiting to buy cars, repair washing machines, renovate their homes, and do just about anything that has been put on hold) is strong, and the innovative, adaptive entrepreneurial spirit creates new opportunities for business owners and individual workers. Eventually demand tapers off and a slower growth economy re-emerges, as the country tackles residual unemployment, the working down of debt, and changes in consumer spending habits.

 

An (Elongated) U shaped recovery includes a longer bottoming process. Recovery is delayed while Covid -19 testing and mitigation efforts are successfully put in place and therapeutics are developed. During this time period it is assumed that both monetary policy and fiscal stimulus is applied to support individuals and companies displaced by the shutdown. The Federal Reserve’s massive programs to keep money flowing in the economy and the various relief bills in Congress including the recent CARES Act are prime examples of critical government support. A U-shaped recovery also allows businesses to develop ways to reopen in a manner where workers and customers feel safe.

The U-shaped recovery is optimistic in that it assumes demand eventually returns to pre-Covid levels, only with somewhat different sets of cultural and personal priorities. At issue is how long the bottom of the U is and what realistically can get accomplished while we wait for the upturn.

 

Nike Swoosh. The Nike Swoosh recovery theory is not new. It emerged after the Great Recession and describes a slow, drawn out recovery after an initial downturn. It is not entirely pessimistic (as would be an L shaped recovery) but a quick return to normalcy is less likely.  It reflects a scenario where people spend less, save more and work down the debt they accumulated in the current crisis. It is also a scenario where unemployment could remain stubbornly high for a period of time.

 

 

 

Of all three possible scenarios, none is the perfect “V” shape (quick return to business as usual) recovery that lots of people hoped for at the beginning of this crisis. Nonetheless, each leads to a recovery in the end. The difference is how we get there.

So how does all of this translate into the stock markets? I mentioned in my market commentary that bottoming is a process that usually takes months rather than weeks to develop. If I could personify the markets for just a moment, it would be that they love to be the first one to be “right,” but they often must eat their bets. And they have no humility. This can lead to volatility and a series of bear market rallies and retreats before markets achieve a longer-term sustainable push higher.

I would find it highly unusual if our current bear market rally would be the only one we experience in the coming months. It is the virus (and all the efforts to test, trace and mitigate it) that will lead us out of this recession and not the traders. Until there is more clarity on the containment of Covid-19 and the extent of economic damage that is being caused, it is unlikely that the recent market rally is the all-clear signal.

That means the markets could go down again before rallying a second or even third time. That doesn’t mean that markets will necessarily retest the lows set on March 23rd, but they could. It is simply too soon to tell where the actual bottom will be or when it will be reached. Much depends on the interplay of the disease, science, testing, governments, companies and individuals. As the common refrain reminds us, “We are all in this together.” Markets too.

Betsey A. Purinton, CFP® is Managing Partner and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at bpurinton@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.