Hopes of a V-Shaped Recovery Are Fading

The economic impact of the coronavirus may lead to a slow recovery.

  • U.S. markets fell into bear territory in just 16 days
  • Recession predictions continue to increase foretelling a long downturn
  • The stock market is likely to bounce back before the economy

Yesterday marked the end of the longest-running S&P 500 bull market. We've just seen the fastest fall into a bear market for the index in history, according to LPL Research. For comparison, it took 30 trading days for the stock market to fall 20% from its high in 1929. This time it took close to half of that. Investors are panicked and caught off guard after the disease spread rapidly around the world. Health care systems around the world are proving to be poorly prepared for such a crisis, and how this unfolds is now solely in the hands of a few politicians. There's nothing comforting about that realization.  

fastest Bear Market chart
Source: LPL Research.

Most experts talk of a "V-shaped" recovery once quarantines are removed and spending and production resumes. This would be a quick rebound to normalcy after a sharp fall. But the last few weeks have cast doubt on this estimation, which explains the rapid selloff. If the outbreak extends into summer, that's a significant loss of demand that can't be made up later and supply chains will take longer to repair.

"Uncertainty around the impact the virus is having and will have on business and consumer spending is heightened and explains the dramatic asset volatility in recent weeks," wrote Goldman analysts about U.S. equities on Wednesday. On March 1, Claudio Borio, the Bank of International Settlements’ head of the monetary and economic department, said "no one wants to catch a falling knife" since the expectation of a rapid V-shaped recovery appears "grossly unrealistic." 

"V-shape recovery theory has been significantly challenged, as investors correctly entertain the idea of a far more protracted recovery," wrote Citigroup analysts on the global economy in a note on March 5. "The feedback loop between U.S. equities, EM credit and EMFX in this environment is biased to the downside. It is absolutely clear to every single investor that the general end of 2019 EM/DM growth consensus is not going to materialize."

What other shapes are there? We have U, L, even W. Many experts are betting on "U," at this point as the long-term effects of shutdowns are expected to linger despite monetary and fiscal stimulus. "The trajectory we have penciled in is a deep ‘U shape’ where the bottom is quite low, flirting with recession levels," said Michelle Meyer, head of U.S. economics for Bank of America Securities. If the virus spreads unabated to most of the population in the U.S. and the world, as some scientists are projecting, we could see the dreaded L-shape or a persistent slowdown.

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  1. https://lplresearch.com/2020/03/12/the-fastest-bear-market-ever/#more-15874

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