As the calendar turns to the second half of 2020, countries around the world are still
battling the COVID-19 pandemic.
In just six months, more than 11.4 million infections have been
confirmed in at least 188 countries and territories, and more than a half million people have died.
As the virus spreads, it is also leaving economic destruction in its wake.
The pandemic has forced governments around the world to enact
what the International Monetary Fund has called "The Great Lockdown,"
measures including travel restrictions, nonessential business closures, and social distancing policies.
So how bad is it?
According to the Bureau of Labor Statistics, the U.S. unemployment rate as of June was
11.1%.
And although unemployment fell in May and June, since February, the jobless rate is
up 7.6 percentage points and the economy has lost 12 million jobs.
As of July 7th, the Atlanta Fed's GDP Now Survey is predicting second-quarter GDP growth
at -35%, which would be the worst reading on record.
And, despite trillions of dollars in monetary and fiscal stimulus,
consumer sentiment remains low and personal income has begun to drop again.
Even with the grim economic data, the U.S. stock market has mostly shrugged off the bad
news, rebounding since the March lows.
But can the market's strong performance continue?
It likely depends on the shape of the economic recovery.
Past recessions and recoveries have followed four common shapes: V, U, W, and L. These
letters describe the trajectory of GDP growth and other economic indicators.
The most ideal path for recovery is V-shaped, which is a sharp downturn followed by a quick
reversal and return to growth for both the economy and the financial markets.
The last time the United States experienced a V-shaped recovery was after a brief recession
in the early 1990s.
Today, a V-shaped recovery could potentially require medical advances to mitigate the risk
of the virus combined with continued economic stimulus.
Investors seem to have priced in this scenario, but any setback could see markets sell off
again.
If shutdowns last longer than expected, the economy may experience a U-shaped recovery.
An example of this is the Great Recession of 2008, which lasted nearly two years.
Even after GDP growth resumed, the economy took several years to recover fully.
If we experience a U-shaped recovery today, many businesses could face bankruptcy and
job losses could intensify.
Investors could expect further disruptions for retailers, airlines, restaurants, casinos,
and others.
The longer people stay inside, the more likely these industries will be changed forever.
While a U-shaped recovery is possible, many economists are predicting a W-shaped recovery.
In this scenario, the economy begins to recover rapidly, but then falls into a second period
of decline, also known as a double-dip recession.
The United States experienced this following the oil crisis of the late 1970s and interest
rate hikes in 1980.
This may already be playing out as states and countries begin to reopen.
As economic activity returns, COVID-19 infections are rising, and some areas are shutting down
again.
The worst-case economic scenario is an L-shaped recovery, where growth falls precipitously
and then stagnates for many years.
The most famous example of this is The Great Depression, which took about a decade to recover
from.
But, is this really a possibility?
It all depends.
If factors such as the government stimulus stops or efforts to create a vaccine fail
and shutdowns remain, there could be long lasting economic damage.
To judge the shape of the recovery, investors should keep an eye on key economic indicators,
specifically, GDP, the employment situation, consumer sentiment, and personal income.
Consumption accounts for about 70% of GDP in the United States.
Once consumers feel safe and confident in the future, the economy will stabilize.
Amid all this uncertainty it is important to stay informed.If you're a long-term investor,
consider staying invested, and if possible,
contributing to your retirement account.
If you're researching individual stocks, consider diversifying and focus on companies
with good balance sheets, low debt-to-equity ratios, and strong cash flows.
Resilient companies may be best positioned to outlast a recession.
For short-term traders, volatility has returned and may not go away any time soon.
The VIX has remained elevated, hovering near 32, which means the S&P 500 is expected to
have a 2% move up or down roughly 1/3 of the trading days.
It's important to manage your risk and get out of losing positions quickly when you know
you're wrong.
The bottom line is that this crisis is like no other, and most likely it'll have a recovery
like no other.
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