In the very long list of tough questions investors need to ask themselves right now, near the top is whether the sharp drop in the S&P 500 from above was enough to assess what is supposed to be an incoming recession. With the actions going through the numbers we have obtained so far, it is fair to say that they were anticipating at least the first wave of extraordinary pain. The next test will take place on Thursday with 5 million unemployed people expected before a long weekend. Selling stocks on Friday was such a feature of the COVID era that stability before the holidays would be a huge sign of confidence for investors.
Even if that does not happen, the recent rebound in stocks is a big development in itself. If it continues to rise, it means that investors need to rethink what a recession means in this current environment.
New York data suggests that the viral curve could flatten out faster than the worst expectations. The stabilization of the figures in Italy means that even when health care systems are outdated, the trajectories of epidemics generally follow the same form. Unless there are surprises (reinfection / viral mutation being the most frightening), the spread of the virus has lost its rank as a negative market catalyst. If the virus is not the main concern and the economic data is not either, the deciding factor at the moment is to consider what life will look like on the other side of this event. It is a puzzle riddled with behavioral bias, no doubt.
But the guessing game is: what percentage of our lifestyle will stay the same and – crucial in the short term – what percentage of businesses that existed before will exist after? This is an important element of the debate on the form that our economic recovery takes: a V, a U, a W, an L, etc. If life is more or less the same, most of the demand that has evaporated for products and services is simply being pushed back, and this is largely what is reflected in analysts’ current earnings forecasts. No, I won’t buy twice as much Starbucks to make up for what I didn’t buy last month, but I also bought a lot more groceries than ever.
According to almost everyone, a technical recession (drop in GDP by 2 over a year) is now a given. But if the recession does not have a lasting effect because of the modified spending habits and the enormous amount of stimulus that we injected in advance, perhaps in the alphabetical soup of forms of recovery, we should consider another letter: the lowercase “r”.
In this scenario, the economy rebounds strongly in a wave of festive consumer activity after the quarantine is lifted, then decreases as the less obvious ramifications of our silent recession make their way through the markets. The stock market seems to be hinting at the first part right now – the sharp rebound.
However, a V implies that we return to where we were. An “r” does not work. The high probability of bankruptcies in the oil and energy sectors, some small business closings and the potential for inflation for the first time in decades mean the road ahead is unlikely to be the same bubbling economy that was taking shape at the end of 2019. But that will be far from the L-shape that was the Great Recession, which deserved an “R.” uppercase