The Alphabet of Market Recovery
The Alphabet of Market Recovery
Published on March 25, 2020
There is much debate surrounding the current market correction.
The two most commonly ask questions are:
1) “When will it end?”
2) “How quickly will it recover?”
The answer from experts should be “I have no idea”, however that will not get you TV. So, the prognosticators are making their bets on what the ‘other side’ of this might look like. With that comes an explanation of letters that symbolize the different types of recoveries.
Market corrections come in many shapes and sizes. However, economists tend to refer to the following four shapes the most:
V-shaped correction are corrections that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. A V-shaped correction is a best-case scenario.
We most recently experienced this 3rd Quarter 2018 into 1st Quarter 2019.
The correction of 1990 to 1991 and the correction of 2001, both of which only lasted eight months and are considered to be V-shaped corrections.
U-shaped corrections begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again.
The correction from 1971 through 1978 when both unemployment and inflation were high for years is considered a U-shaped correction.
W-shaped corrections are corrections that begin like V-shaped corrections but then end up turning back down again after showing false signs of recovery. W-shaped corrections are also called “double-dip corrections” because the economy drops twice before a full recovery is achieved.
A W-shaped correction is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice once on the way down and then once again after the false recovery.
The corrections of 1980 that double dipped in 1981 and 1982 is a great example of a W-shaped recovery.
L-shaped corrections are corrections that fall quickly and fail to recover. An L-shaped correction is a worst-case scenario because they offer no hope of a quick recovery.
The Japanese recession that began in the early 1990s is considered an L-shaped recession.
Well there you have it. Four of the possibilities for the market future. The "L-Shape" recovery has a lot of traction with the economist I follow and I tend to lean towards this one if I have to make a choice. My reasons are this, we simply do not know the long-term global impact of Covid-19. At this point we do not have the proverbial "light at the end of the tunnel". Once we can see an end to this it will be easier to predict the future.
So I am saying what the experts should be saying; "I have no idea". In 25+ years and all my economic study I have not seen anything quite like this. Since I am not on TV, I am allowed to actually be honest. For me, I would sit this one out. Cash is king and only giving up the returns from 2019 to not put myself in harms way of all the unknowns seems like good strategy at this point in the game.
Best of luck, stay home, wash your hands, love your family, call your friends and we will get through this together.
Tim Lofton | CEO | The Retirement Blueprint