Will the Market’s ‘V’ Recovery Persist?
The question is whether the market’s ‘V’ recovery will persist?
Sentiment in the US equity market continues to look on the bright side. Despite dismal economic numbers, which are set to become even grimmer, the collective wisdom of investors appears to be betting on a strong rebound in the near future.
The S&P 500(NYSEARCA:SPY) Index recently suffered its steepest, quickest drawdown in the post-war era, but the benchmark has since bounced back dramatically. After suffering a 33.9% drawdown on March 23, just weeks after setting a record high in February, the S&P 500 has recovered about half that loss. Compared with the top-10 drawdowns since 1950, that’s an impressive record… so far.
The question is whether the market’s ‘V’ recovery will persist? No one knows, of course. But to be an optimist on this front one has to think positively in the extreme, namely: that Mr. Market will be able to look through the mind-numbing economic data that’s yet to come.
The deluge continues with this week’s employment numbers for April. Today’s ADP Employment Report for last month is expected to show an incredible loss of 20 million jobs, based on Econoday.com’s consensus point forecast. If correct, the loss will reverse a decade of growth in the labor market.
Sign up for our Newsletter & get the FREE eBook
Retirement Day Trader:
How to Sell Weekly Options for Steady Income
The carnage will almost certainly continue in the government’s payrolls estimate for April that arrives this Friday — a report that’s widely expected to deliver similarly dark news.
The optimistic spin is that because the recession was self-inflicted – a means to fight the spread of coronavirus – the recovery will arrive quickly once the all-clear signal arrives. The so-called ‘V’ recovery for the economy, in other words, will follow the forward-looking stock market’s ‘V’ bounce.
That’s close to the best-case scenario and it’s what everyone is hoping for. But the reality is probably more complicated. “Growth rates are confusing,” says Bart van Ark, global chief economist at The Conference Board. “Of course we’ll get a recovery. If one store opens that will be a recovery. That doesn’t mean we’ll be anywhere close to where we were.”
The main challenge for anticipating the strength, extent and timing of the economic rebound: countless variables that will unfold in the weeks and months, and unfold in a way that’s interdependent with a high level of uncertainty. There’s no useful precedent for what’s going on and so modeling the future is a black hole of doubt.
Indeed, there are several paths for the economic recovery, as the Brookings Institution advises. The possibilities range from the ‘Z’ rebound – a sharp rebound that briefly lifts the economy above the previous trend path — to the worst-case scenario: the dreaded ‘L’ recovery, where the economic blowback leaves a permanent loss.
There are several intermediate paths between those two extremes and it’s reasonable to assume that some middle way is likely if not necessarily fate. That doesn’t rule out a ‘V’ or even a ‘Z’ bounce, but for now it’s hard to have a high degree of confidence that the stock market’s near-best-case outlook is the most likely path.
“At the beginning of the pandemic, few understood how long it would be before life returned to normal, and many analysts talked of V-shaped recoveries,” advise the Brookings’ researchers. “Many analysts now believe that, barring major improvements in COVID treatment (which would make the disease less dangerous), only a vaccine can allow economic activity to return to the pre-pandemic baseline.”
Even once the economy starts to reopen, measures will likely be put in place that curtail economic activity to some degree—travel will be less common, businesses will have to space workers and customers further apart, restaurants will be serving fewer customers at a time, and sporting events, concerts, and other activities involving large crowds probably will remain off limits for a long time. And even if the rules allow, many people may be reluctant to return to life as it was before the pandemic.
So, there will likely be no quick recovery. A key question is whether damage to the economy’s capacity to produce goods and services will be long lasting.
In terms of policy decisions, politics will (unfortunately) play a role. That’s a significant wild card in election year.
Dr. Anthony Fauci, the White House’s top coronavirus task force adviser, summarized the high-stakes political challenge. “It’s the balance of something that’s a very difficult choice,” he said earlier this week on CNN. “How many deaths and how much suffering are you willing to accept to get back to what you want to be, some form of normality, sooner rather than later?”
No one person or government department can offer a definitive, enduring answer at one point in time. Rather, the answer will evolve over months, as the collective wisdom of the government, the voters, health officials and other groups and institutions weigh in.
In short, it’s going to take time to figure out what’s possible, politically and economically, and what’s not. The stock market seems to think otherwise, which is to say that the rebound in shares reflects a relatively upbeat forecast – a forecast that may or may not be accurate.