Written by Hudson adviser Michal Park
The market crash we experienced over a matter of weeks in the first quarter of 2020 was the fastest in history. The cause of the crash - COVID-19 - was unprecedented. Yet a market decline does not last forever. It will eventually recover, but it is difficult to know how the recovery will look with new data being delivered daily to make already jumpy markets even jumpier. So just like Paul the Octopus*, the animal oracle who made many accurate predictions during the 2010 World Cup, today we'll let a light game of scrabble determine the type of market recovery we have in front of us.
Generally, there are four shapes that define a sharemarket recovery:
V shaped sharemarket recovery - steep decline, quick recovery
As the name suggests, a VICTORIOUS or V shaped recovery (21 points) means the markets will rebound as quickly as they fell. At their lows March 23rd US markets were down 34% from the February all time high and have already recovered 69% of the losses to now sit only 11% below the February all time high. Is it sustainable? In order for markets to remain on an upward trajectory, absolute certainty is required and this will come in the form of a vaccine. Given that restrictions are easing globally and economies are beginning to "reopen ", a V shaped recovery may seem likely, but in reality, a reopening of an economy does not mean things will immediately go back to normal.
U shaped sharemarket recovery - long period between decline and recovery
UNRAVELLING (19 points). This type of recovery suggests a longer period between markets bottoming and rebounding. Economies reopening gradually and consumers slowly returning to their normal ways, albeit with some changes (social distancing) suggests a U shaped recovery is very plausible. Everything really is weighing upon how the virus is managed over the next few months including whether the curve continues to flatten on a global scale.
W shaped recovery - Quick recovery, second decline
W shaped as in second WAVE (10 points). The double dip market decline, a W shaped recovery is very likely in my opinion with all the information we currently know. We've seen the market lift strongly already based upon curves flattening and economies reopening, however, is it too soon? Will we see a second wave of the virus? Any hint of a second wave will bring fear back into markets, stall a recovery and lead an inevitable second decline.
L shaped recovery - an extended downturn
This is the LENGTHIEST (18 points) recovery of all, the worst case scenario and possible only if everything goes wrong. I think this is the least likely shaped recovery due to government intervention, controlled virus outbreaks and future economic stimulus plans.
So there you have it. I personally lean towards a W shaped recovery, yet a V shaped recovery is clearly the winner in this game.
*RIP Paul (28 January 2008 - 26 October 2010)