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The Shape of the Recovery

One can’t watch or read any daily news without seeing a new perspective on the ‘shape of the recovery’, with economists, money managers and pundits strongly arguing their respective points. In this letter, we will outline the more popular theories. Get ready for some alphabet soup!

A ‘V-Shaped Recovery’ takes place when the economy rapidly contracts into recession, and is then followed by a sharp, strong recovery. A graph of an economic recovery in this fashion resembles the shape of a ‘V’. Most economic recoveries resemble this shape, as historically, the harder the fall, the stronger and swifter the recovery. This is especially true when the cause of the economic shock is external, as is the case here. If not for the coronavirus, most think we would still be in the middle of the longest bull market in history. The tech bubble recovery was a V-shaped recovery that was short lived, as it was quickly followed by 9/11. A V-shaped recovery means everyone quickly gets back to business and spending.[1] The International Monetary Fund currently predicts a V-shaped recovery, as does every other pundit on TV.

A ‘U-Shaped Recovery’ is when things recover in a healthy fashion, and relatively quickly, but by no means is it ‘all systems go’. In other words, people get back to business, but in a more gradual fashion. Under this scenario, things are getting better all the time, and there are no major setbacks, but it takes months or even a year or more to get to full steam again. Our most recent recovery, after the 2008/2009 financial crisis, was a U-shaped recovery, albeit a far slower one than normal. By comparison, if we are really in a U-shaped recovery now, we are on pace to recover several years faster than we did after 2008/2009. Those predicting a U-shaped recovery include JP Morgan, ING, and CNBC’s Jim Cramer. A U-shaped recovery is also the favorite choice of 50 economists surveyed by Reuters.

A ‘W-Shaped Recovery’ takes place when the economy rapidly contracts, appears to sharply recover, only to collapse again before the real recovery. A graph of an economic recovery in this fashion resembles the shape of a ‘W’. The early 1980’s recession, one some readers may recall, is the most recent example of a W-shaped recovery. In 1980, the economy fell into recession, only to quickly recover. The recovery took place so quickly that high inflation accompanied it. The Fed dramatically raised interest rates to slow inflation, only to drive the economy back into recession. The economy ultimately recovered in 1983 and continued a period of incredible growth that went on for over 15 years. Many economists believe we are in the middle of a classic W-shaped recession. They hold that the V-shaped recovery we are currently experiencing is really the middle of a W-shaped recovery, which means we are in for another massive move downward before the real recovery begins. This group of prognosticators, which includes Moody’s Analytics, argues that the recent stock market run-up is really a head fake.

With an ‘L-Shaped Recovery’, the economy stays weak for many years until it finally recovers. An L-shaped recovery has never happened in the United States. For a modern-day example, we need to look to Japan, which plummeted into a severe recession in the late 1980s, taking nearly 20 years to recover, and never again reaching its rapid growth rates. I