Why The Experts Are Wrong About A ‘V’-Shaped Recovery…

At the end of last week’s strong recovery, the consensus appeared to be that things are on their way back to normal. That’s seen in the stock market’s rapid gains, shown below in the chart of the S&P 500 Index.

At the bottom of the chart is the stochastics indicator, a widely followed measure of momentum. This indicator shows that, even though prices were climbing last week, buying was slowing.

That makes sense, as does the drop we saw at the beginning of this week. Some investors are starting to feel uncertain about what’s going to come next — a question that will require time for more data to develop before we find an answer.

What The Data Says

Unemployment data shows how difficult it is to analyze the economy at this point. Over the past four weeks, about 22 million have filed new claims for unemployment. That represents more than 13% of the workforce. New claims indicate unemployment will top 15% when its reported in May. But analysts are shrugging that off because it is related to the shutdown caused by the virus. They believe the economic slowdown will be deep, but brief.

There seems to be some uncertainty as to how deep the economic contraction will be, with estimates ranging from a relatively optimistic decline of 9% in second-quarter GDP to as much as 50%. The median estimates are more than 30%.

But economists expect a rapid rebound. This can be seen in the International Monetary Fund GDP estimates for this year and next.

In all cases, the IMF expects growth in 2021 to be much stronger than it was before the virus shut down much of the global economy.

Would You Take Your Kids?

As an investor, I have to ask if that’s realistic. As a parent, my answer is no.

Lockdowns will end soon. But that doesn’t mean I’ll be taking my kids to Disneyland.

Okay, so I wasn’t planning a trip to Disneyland before this happened. But my point is that I will still be cautious about taking my children into crowds. In my mind, there’s no immediate reward to accepting that much risk.

Other risky places we won’t be returning to for a bit: Fast-food restaurants with play areas, because I won’t be comfortable letting them play. Parks are a question in my mind for now, but the experts seem to say outdoor areas will be fine if we wipe everything down. I just don’t know how realistic it is to wipe everything down with my kids because they are faster than me and they outnumber me.

There’s a lot to think through. And I’m not the only thinking about what activities will be safe when the world reopens. Everyone I know is questioning what they’ll do. More importantly from an economic perspective, everyone I know is creating a list of things they won’t do.

If you think I’m being overly cautious, ask yourself, what activities will you feel comfortable jumping straight back into? If your local movie theater reopened next week, would you rush back to sit next to a bunch of strangers? How about a sporting event or a concert? Is this going to make you more likely to go to the mall, which was already losing customers?

Closing Thoughts

Consumer behavior isn’t going to snap back immediately, so it’s unlikely we will get the V-shaped recovery some economists are forecasting. My bet is that we’ll have more of a U-shaped recovery —with the bottom of the “U” lasting at least two quarters.

The reason it will take time to recover is because it isn’t realistic for things to reopen as immediately as they closed. No matter how many consumers do return to “business as usual,” it’s not going to be as many as before. And when sales don’t immediately snap back, it will certainly lead to some businesses closing even after they reopen, despite all of the relief small businesses are being offered.

Because some businesses aren’t going to reopen, it will lead to a fresh bounce in unemployment, after the initial decline.

Long story short, these are factors that point to an extended recession. Unlike the IMF, I don’t believe 2021 will be stronger than 2019 because we still don’t know how bad 2020 is going to be.

The stock market is ahead of itself, and a second leg down is near. Momentum confirms the decline is near, most likely beginning within the next two weeks.

P.S. The selloff caused by the coronavirus pandemic may have investors feeling uneasy. But it’s also a big opportunity…

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