W-Shaped Recovery

What Is a W-Shaped Recovery?

A W-shaped recovery refers to an economic cycle of recession and recovery that resembles the letter "W" in charting. A W-shaped recovery represents the shape of the chart of certain economic measures such as employment, gross domestic product (GDP), industrial output, and others.

A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back upward, followed again by a sharp decline and ending with another sharp rise. The middle section of the W can represent a significant bear-market rally or a recovery that was stifled by an additional economic crisis. A W-shaped recovery is also known as a double-dip recession.

Key Takeaways

  • A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession. 
  • When charted, major economic performance indicators form the shape of a letter "W" during this type of recession.
  • A W-shaped recovery is also known as a double-dip recession.
  • W-shaped recessions can be particularly painful because the brief recovery that occurs can fool investors into getting back in too early.

Understanding a W-Shaped Recovery

A W-shaped recovery generally is characterized by a period of extreme volatility in comparison with other types of recoveries. There are countless other shapes a recession and recovery chart could take. Common examples include patterns in the shapes of the letters "V," "W," "U," and "L." Each letter represents the general shape of the recovery's chart of economic metrics that gauge economic health.

A W-shaped recession begins like a V-shaped recession, but then turns back down again after showing false signs of recovery. W-shaped recessions are also called "double-dip recessions" because the economy drops twice before the full recovery is achieved.

A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery.

The U.S. experienced a W-shaped recovery in the early 1980s. From January to July 1980 the country's economy experienced the initial recession, then entered recovery for almost a full year before dropping into a second recession in 1981 to 1982.

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Drastic shifts in market sentiment are par for the course during economic phases such as recession or recovery. This is a natural part of the economic cycle and is expected based on the release of new information. Broadly speaking, concerns of the day lead to sudden shifts in consumer or corporate behavior, which in turn have a great impact on the direction of the markets and state of the economy.

One day it might look like the market or economy is on the road to a quick recovery, but then the underlying situation changes and that market or economy dips lower again. Relapses in economic, corporate, or consumer-level trends are not uncommon; this is the very nature of the W-shaped recovery.

Looking at the COVID-19 pandemic, global economies were hit hard during the first wave, and then recovered at different rates as news of a vaccine was announced, then administration of it was planned and accomplished. Subsequent waves hit economies and markets in different ways, but for many, a move lower was the norm as government restrictions were altered, businesses closed their doors, and individuals' finances were affected.

In many ways, the COVID-19 situation created a case study on the negative effects of a W-shaped recovery, and it continues to impact investors, individuals, and governments around the world.

Looking a bit further back in history, a strong example of a W-shaped recession was the European debt crisis that occurred approximately between 2010 and 2014. The crisis spilled out of the Great Recession near the end of 2009 and was marked by high levels of government debt.

As the pressure of bank bailouts increased, investor confidence decreased, which sparked the start of an economic decline. Once immediate concerns over certain governments' solvency levels started to wane, broader economic conditions started to improve.

However, this improvement would turn out to be short-lived as further rounds of bailouts and shifts in spending would be required, which in turn affected the trajectory of recovery and resulted in a double-dip recession. Countries that were hardest hit by the double-dip recession were Portugal, Spain, Germany, Ireland, and Cyprus.

What Is a Double-Dip Recession?

A double-dip recession is a term used to refer to a recession that is followed by a short-lived recovery, and then is followed by yet another recession. Such a relapse into recession after already being in a recession isn't uncommon as investors start to question the conviction of a recovery based on new or changing information.

What Is a Double Bottom Pattern?

A double bottom pattern is a chart pattern used by followers of technical analysis to mark the reversal in a primary trend. While the W-shape recovery is often looked to by traders on charts of equities, it is also used to monitor major indexes and when trying to spot shifts in economic cycles.

What Are the Most Common Reversal Patterns?

Some of the most common chart patterns that technical traders use to mark major shifts in underlying trends are: double bottom, double top, triple bottom, triple top, head-and-shoulders, cup-and-handle. Reversal patterns typically have a V, W, or U shape.

The Bottom Line

A W-shaped recovery is an economic cycle of recession and recovery that looks like the letter "W" in investment or economic charts of certain economic measures such as employment, gross domestic product (GDP), and industrial output. People also refer to a W-shaped recovery as a double-dip recession.

This kind of recovery involves a sharp decline in these measurements followed by a sharp rise upward, then another sharp decline and finally a further sharp rise. The middle section of the W can turn out to be a major bear-market rally or a recovery stifled by an additional economic crisis. Such relapses in economic, corporate, or consumer-level trends are fairly common.

Article Sources
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  1. National Bureau of Economic Research. "U.S. Business Cycle Expansions and Contractions."

  2. The Guardian. "Weakest Eurozone Economies on Long Road to Recovery."

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