What the Heck is a K-Shaped Recovery?

Among all sorts of economic recovery shapes, K is the hot letter now for many analysts

The US economy officially entered recession in February during the pandemic, ending a 128-month economic expansion, the longest in history, according to the National Bureau of Economic Research.

As in many countries, the US economy shut down in March, in an attempt to block the spread of the coronavirus.

The GDP of the world’s largest economy shrank by an annual rate of 32.9% between April and June, the biggest drop since the Second World War.

The official unemployment rate was 8.4% in August, but some economists say the real figure should be higher than 11%, if including workers in a temporary layoff, or furlough, and the ones who dropped out of the labor force.

Congress and the Federal Reserve have poured trillions of dollars into the economy, but it’s still not clear the path the recovery will take.

Alphabet Soup

Initially, most optimistic economists said the recovery would be a “V” shape after a drastic fall, a robust increase. 

Some were expecting a “W-shaped” narrative, which involves a sharp decline followed by a sharp rise, followed again by a sharp decline and another rise. 

This is when the economy passes through a recession into recovery and then immediately turns down into another recession before recovering again.

So far we have seen some positive signs, but not exactly a strong climb in the economy, particularly with the added volatility this week.

Other economists believe in a slower upturn, a “U-shaped” recovery, with a longer period of unemployment and low economic activity.

The most pessimistic ones expect an “L”, characterized by a very slow rate of recovery, with high levels of unemployment for a long period and economic stagnation.

Now, one new letter of the alphabet joined the discussion: “K.”

A K-Shaped Recovery

In this case, the economic impact of the crisis and the recovery growth is uneven. They follow two opposite paths. Some sectors and some groups of the society go through a recovery and another part go into recession.

The wealthier businesses and individuals would earn more and be part of the upper path of the K and the poorest would be struggling to make ends meet each month the lower path of the K.

An example of this K pattern would be the stock market, which despite recent losses has had a strong surge since March, especially compared to the rest of the economy.

The Nasdaq Composite, for instance, rose about 20% and booked more than 30 record closes so far in 2020.

 

In this pandemic, industries like transportation, leisure, entertainment, food service, energy, real estate assets like shopping malls and offices, and mom-and-pop business are among the most affected.

On the other hand, the big-box retailers, technology companies, and the financial sector have largely recovered.

This downturn is unique and it’s still not totally clear which shape of the “alphabet soup” the recovery will have. 

It will depend on many factors, including the future of the pandemic if it will happen a second or third wave, for instance and also the next steps the government will take to stimulate the economy.

And even with the vaccine, the recovery in some sectors may be slower than others.

But this doesn’t mean that the sectors that suffered most don’t offer good opportunities for investors. 

Stocks with low prices today can go up in the future, but it may be hard to predict when.

So keep in mind that these undervalued stocks could be good trades. Just plan for the long term.