Who Do You LUV? Recovery Shapes

By Bud Kasper, CFP®, AIF®

May 5, 2020

Who Do You LUV?

This has to be the craziest title I’ve ever created for an article based on stocks, bonds, and the economy, but it is appropriate. This weekend I spent close to six hours reading research reports and opinions on what COVID-19 has done or still might do to our economy, our stock and bond markets, and our overall way of life. Could any of us ever conceive what is happening to our fellow Americans?

I know I couldn’t! As of April 24, 2020, the U.S. has recorded 895,766 documented cases of COVID-19, with 50,439 recorded deaths. There are over 26.5 million Americans out of work and who have applied or are applying for unemployment benefits. The U.S. Conference Boards Leading Economic Index, which covers ten economic indicators, shrank in March by 6.7%, its most significant decline in 60 years. April’s results are not out as of writing this. All of this damage is due to the coronavirus, or COVID-19. Who would have “thunk” it?

What is a Bear Market?

The definition of a bear market is a -20% drop from any prior high. This year’s high point for the S&P 500 occurred on February 19, 2020, when it was up +5.08%. It took only 20 days to March 11, 2020, for the 500 to drop a total of -20%. It was the fastest drop to a bear market in stock market history. From there, it fell another -15.51% to March 23, 2020, for a total peak to trough loss of -35.51%. As of April 23, 2020, the S&P is still down -13% from the first of the year, down -18.08% from the February 19th high. So the question is, where does the market go from here? The answer is, “I wish I knew!”

So what about “Who Do You LUV?”

Now, I’ll explain my crazy article title, Who Do You LUV? Please note that I have underlined four letters in the title. Each of these letters, W, L, U, and V, suggests different types of economic outcomes that hopefully result in an economic recovery! Remember, an “economic recovery” suggests recovery for both the stock and bond markets as well.

Types of Recovery Shapes

V Recovery Shape

You might have heard Wall Street Journal pundits state the best case for the stock market is to have a V-shaped economic recovery. This interpretation suggests the market has already suffered its worst and is now poised to go back towards where it was on February 19, 2020, when the S&P was positive +5.08%. Minimally we might expect to see a return to at least where we were on January 1, 2020. 

While a V recovery is the preferred result and one that would please us the most, we aren’t confident it will be the outcome for 2020. Why? Because we don’t believe we truly understand the amount of collateral damage COVID-19 has brought to so many areas of our economy, and for that matter, the world. Airlines, hotels, cruise ships, restaurants, manufacturing, sporting events, bars, even Disney World has shut down!

The list goes on and on. Of the 26.5 million Americans who are out of work, the question is, what percentage of these folks will get their old jobs back? Many of our unemployed may have to do something different if their previous position is gone. These are the questions that require answers for us to become more confident about the type of recovery we may experience. It’s for these and other important reasons that a V-shaped recovery may not be our immediate outcome. 

U Recovery Shape

A U-shaped economic recovery suggests that the S&P 500 will float around (+/-) the average of the worst levels of the stock market this year and linger there for an undetermined amount of time until it finally moves back up again to previous market highs. The length of the time spent at the bottom of the U for the most part, just moving sideways, is the unknown and the ultimate indeterminate. To varying degrees and for so many reasons, this could be the outcome. The U shape recovery requires more time to pass than that of the V to repair the damage caused by the bear market born out of this recession. 

To be clear here, we are not yet officially in a recession. 

What is a Recession?

The definition of a recession is two consecutive quarters of negative economic growth in the business cycle. We’ve only finished one quarter! Recessions generally occur when there is a widespread drop in spending. You can now understand why one of the purposes of the first three U.S. government stimulus programs, coupled with our latest “phase four” package of $484 billion, brings the total amount of stimulus to almost $3 trillion. One of the purposes of these stimulus plans is to get money into the hands of both government programs, citizens, and businesses alike.

Recall that 70% of our annual GDP comes from domestic consumption. Do you see a lot of people out and about spending money? Of course not, we are all “shuttered in” as a result of the coronavirus. Various events trigger almost all recessions, but most time, it’s because of a financial crisis. Please refer back to my article titled Black Swan: The Reality Of Unexpected Volatility! So even though we have not met the exact definition of a recession at this very moment, it most certainly appears or is at least seems likely that we’re moving post-haste to that conclusion.

W Recovery Shape

Another possible outcome could be a W-shaped recession. In a W recession, as the letter suggests, the stock market falls, recovers a bit, but then falls back again (generally to retest prior market lows), but then finally rises once again and recovers back to previous market highs. 

This can happen in almost any time frame, a quarter, six months, a year? This outcome is not out of the realm of possibilities. 

L Recovery Shape

While the previous three discussed outcomes are different, they all three promote the result of an eventual recovery. Which our country’s history validates has always happened. It’s the path of the recovery that we’re exploring. There’s one other letter of a recession possibility, and that’s the dreaded L. This outcome isn’t friendly to individuals, businesses, or countries. Quite frankly, we hope to get the L out of here! Please note our attempted humor! The L shape result doesn’t recover; it just stagnates and lingers around its low point for a lengthier period than one can imagine. This outcome is an extreme outlier and really doesn’t deserve any of our attention.

So which recovery shape has the most potential?

So which of the four basic outcomes has the best chance of becoming a reality? If pressed to make a best guess, it’s our belief and our expectation that we’ll most likely recover via a U. With a W recovery as our distant second choice. When analyzed from a fundamental level, it appears to be very obvious that stock market earnings are going to be pressured lower as a result of a lack of economic growth, and profits decline. As a result, it’s probably a safe assumption that company stock prices will fall. When stock prices fall, especially across multiple industries and sectors, it’s pretty safe to assume that the stock market itself will fall as well. Simple right? 

Don’t you believe it! I previously mentioned that President Trump just signed into law our fourth stimulus package. The principal focus of the $484 billion stimulus package is getting money to hospitals, small businesses, and testing for novel COVID-19. Almost all of us view these fiscal and monetary stimulus plans as necessary. We should do whatever we need to do! But remember these plans, as well-intended as they are, will someday have to be repaid. There will be a future price for that as well. 

Dean Barber and Bud Kasper discuss the current market and compare COVID-19 to previous bear markets in our most recent Monthly Economic Update. Click below to watch it now!

► Watch the April 2020 Monthly Economic Update

We’ll Persevere

America has lived through so much in the 203 years since the New York Stock Exchange founding. Through wars, recessions, a depression, political changes, economic bumps and slumps, and human triumphs and tragedies, investors have always been rewarded with time in the stock market. Asset allocation is clearly the most meaningful way to mitigate risk without cashing out when markets are stressed! Tactical asset allocation strategies that constructively readjust for risk in both good times and bad have always helped investors deal psychologically with occasional disruptions they face in challenging times. Please remember that opportunity is born out of uncertainty, and it will be no different this time either!

We stand confidently vigilant by your side as we work through a difficult chapter of U.S. history.

Bud Kasper
President – Lee’s Summit Office

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.