V-Shaped Recovery: Fact or Fiction?

With the financial markets currently on a huge downtrend, it’s hard to picture what the recovery to the current economic situation will be like. Thanks to a constant barrage of bad news and a seemingly total global economic shutdown, the economy is quickly entering a recession. It might be difficult for some to think optimistically during times like these, but it’s important to remember that all recessions will end at some point. When the financial markets and the economy make it through this current crisis, what will the recovery look like?

It might be difficult to consider a recovery and a recession when just one month ago the stock market was at all-time highs, but this is becoming a reality with every passing day. The question is whether or not the economy will experience a V-Shaped Recovery or if the negative effects of the Coronavirus will linger for years. Let’s learn a little more about V-Shaped Recoveries below and what the chances are that our economy experiences one in the near future.

What is a V-Shaped Recovery?

First, it’s important to understand that a recession is a natural part of an economic cycle. It’s never good news to hear that the economy is in a recession, but the truth is that they have occurred throughout history. Recession is a macroeconomic term that describes a period of significant economic decline. This means that by definition, the U.S. is currently in a recession. The usual economic indicators and statistics that are used to confirm the extent of a recession are not yet available because they are primarily lagging indicators, but we will surely receive more confirmation of a recession going forward.

The good news about a recession is that one day, it will end. That’s where the term “V-Shaped Recovery” comes into play. A V-Shaped Recovery is a period of time after a recession where the economy experiences a sharp rise back to the previous levels in the economy prior to the downtrend. These types of recoveries are driven by a huge shift in economic activity after a large downtrend. Increases in GDP and improving numbers in economic metrics like unemployment numbers and industrial output can help to fuel these types of recoveries. If you view the recovery on a chart, you will see something that resembles a capital “V”, which is where the name comes from.   

What Are the Chances of a V-Shaped Recovery in Today’s Economy?

It’s incredible to think about just how quickly market conditions have changed. We have gone from all-time highs in the stock market to discussing corporate bailouts in the span of weeks. The speed at which the market and economic conditions have deteriorated is simply unprecedented. With that said, there are experts and long-term investors holding out hope for a V-Shaped Recovery.

If the economy was able to go down so quickly, what is stopping it from going back up in a similar fashion? The U.S. economy showed a few signs of a recession or slowdown prior to the Coronavirus impact, but for the most part, it was strong. Since the major cause of the decline in financial markets is a health crisis, one could argue that the economy will be able to come back strong after the government gets a better grip on the issue.

On the other hand, it’s hard to believe that a V-Shaped Recovery is likely at this point simply due to the uncertainty of the entire situation. Investors are increasingly flocking into safe-haven assets and out of the stock market. Consumer spending is rapidly declining. These types of impacts make the chances of a recovery rally increasingly low at this point in time. The effect of a global pandemic on the economy is uncharted territory. Some believe that after the quarantine stage is over consumer spending will go back up, but it’s more complicated than that. An L-Shaped Recovery might be more realistic at this stage of the situation, but it never hurts to be cautiously optimistic.

Expect the Federal Reserve to continue with massive monetary and fiscal stimulus packages going forward in an effort to minimize the damage, but temper your expectations regarding a V-Shaped Recovery until we have the opportunity to learn more about the true impact of the Coronavirus on the economy.