What Are the Chances of a V-Shaped Recovery?
So why should you care whether the US economy is in a recession? By many estimates, growth in the second quarter is likely to come in at an even more disappointing rate. With unemployment spiking and various leading indicators still in decline, there’s little doubt that a recession has arrived. An important question today is how deep this recession will be and how long it will last.
Now, beyond being an intriguing subject for economists and pundits in the media, how is this economic downturn relevant to your life? Even if you are fortunate enough to remain employed or your income has not been affected, a recession is likely to impact many aspects of your wealth-building ability.
Figure 1: Initial Claims Rise Past 36 Million This Week
More specifically, an economic downturn can affect your earning ability, your investment returns, and the long-term purchasing power of your wealth. Therefore, understanding the risks and opportunities related to a recession should be your primary wealth management goal.
Hunkering down and waiting for the moment to pass could end up being a costly mistake that ends up putting you miles away from your critical financial goals. To be sure, we believe that taking a proactive posture during this time of economic and market uncertainty is crucial if your aim is to use your money today to pursue your life’s passions and purpose tomorrow.
A Slow or Fast Recovery?
Characterizing current labor market conditions as “bad” would be an understatement. In the past two months, over 36 million people have filed for unemployment in the US. And government data last week showed that the national unemployment rate spiked to 14.7% in April. There’s no doubt that efforts to mitigate the effects of the coronavirus have effectively shut down the economy and have fueled today’s labor market pains.
A vital debate today is how long this downturn will last. On the one hand, some argue that we should expect a “V-shaped” recovery or a quick bounce in US economic growth during the second half of the year. Pent up demand is the rationale for this position. That is, it’s this idea that households will be just as eager to consume today as they were right before the quarantine measures went into effect.
Figure 2: V-Shaped vs. U-Shaped Recovery
The argument on the other side of the recession debate suggests that growth will take much longer to normalize. How is this so? Well, the reason is that the trajectory of the recovery is more likely to take a low and slow “U-shape” path rather than the expected “V-shaped” bounce. Under such a scenario, it’s likely that the start of an economic rebound won’t take place until sometime late next year.
So, what does this all mean in terms of your ability to create and grow wealth? Academic arguments aside, we believe that understanding whether the economy is coming or going may enable you to better prepare for coming risks and set you up for opportunities to create and grow your wealth in the months and years ahead.
Is Economic Growth Coming or Going?
In late March, there was some hope that the economic impact from quarantine efforts would be short-lived. That’s when Congress pushed through a two-trillion-dollar economic stimulus bill to help small firms and households stay solvent. At the time, there was hope that flattening the curve and news of some promising drug treatments to address the coronavirus outbreak would quickly put the matter to bed. Today, however, many indicators show that economic and health situations may not be as short-lived as once hoped.
For example, the Paycheck Protection Program (PPP) was established by Congress with the hope of keeping small businesses alive. And while demand for PPP loans was strong at the outset, it eventually became clear that financial support did not entirely reach its intended audience. Reports of large corporations receiving funds meant to help small businesses swarmed headlines as stimulus money ran dry.
Figure 3: A Breakdown of the CARES Act
Now, Congress pushed through a second bill in April to provide additional financial relief to small businesses. However, the rules specific to loan forgiveness were ambiguous and left business owners with more questions than answers. The result was reluctance among some business owners to apply for this much needed financial relief. Lack of clarity surrounding one aspect of the CARES Act has brought into question the overall effectiveness of fiscal policy measures. And what’s there to say about healthcare policies?
Well, curve flattening has indeed worked in some localities. Even so, coronavirus dangers could linger for longer across much of the US. We are heartened by reports that cities hit hard by the coronavirus, like New York and New Orleans, are seeing a decline in newly reported cases thanks to quarantine efforts.
Figure 4: Coronavirus Cases Still on the Rise Outside of Recovery Zones
At a national level, however, COVID-19 cases continue to rise. And the lack of a coordinated national policy response could lead to a perpetual game of whack-a-mole. This comes as some cities and states across the US remain shuttered while others reopen-for-business. This uneven containment effort is quite striking given that a vaccine for the coronavirus is still months away, and its efficacy remains questionable.
The point is that economic growth is likely to stumble further, even as businesses reopen in the coming weeks. In the US and around the world, the coronavirus continues to wreak havoc with what seems like nothing to stop it. Cities once considered to have eradicated COVID-19 are again shutting down as a second wave of the outbreak looms. Add to this the waning effects of fiscal stimulus and the ongoing gridlock on Capitol Hill, and the point is that it’s hard to make a case for a rapid economic rebound.
Rising Risks to Creating and Growing Wealth
There’s little question that the data overwhelmingly reinforce the point that a recession has arrived. What’s more, the evidence is mounting that the economy will not bounce back as quickly as some people had hoped. These factors mark a significant departure from what had been the status quo at the beginning of the year. This means that many threats will be lurking to challenge the way you go about creating, growing, and preserving financial wealth in the coming months.
For example, what was supposed to be only temporary, now layoffs are turning more permanent. This is evidenced by a rising number of firms announcing layoffs. And these aren’t just restaurants or retailers paring back jobs. The reports are more and more coming from work-from-home white-collar employers. This means that income – a key component for building enduring wealth – is likely to be less stable for an increasing number of individuals in the months ahead.
Figure 5: National Unemployment Shattering Post-War Records
The new reality that the recession may be worse than initially planned is also likely to put downward pressure on risk asset prices over time. In fact, the pullback in asset prices this week partly happened because of this realization. Risk assets have had a strong run recently, with tech stocks reclaiming their losses for the year in some cases. We’ve been arguing, however, that the run-up in stock prices probably has been a bit premature. What’s more, the rally has made some investors complacent to risks and put them in a spot susceptible to a sharp market pullback.
Another issue that you should be concerned with is the risk of long-term inflation running hotter than expected. The sheer magnitude of monetary and fiscal stimulus efforts currently underway are likely to put downward pressure on the long-term value of the US dollar. This means that your retirement or savings plans may need to be adjusted as potentially faster inflation eats into your long-term purchasing power.
Be Prepared for Recession-Related Risks
So how can you better prepare for the income and market-related issues we just covered? Well, along with all these risks, the recession is also likely to bring you some opportunities. These include increasing your ability to stand out in a crowded marketplace and more opportunities to improve your investment rate of return. When handled with care, risks could eventually turn into opportunities that set your wealth up for long-term gains. Where to begin?
We recommend using today’s economic setback as a potential setup to take your income-earning ability to the next level. Various indicators suggest that layoffs and business bankruptcies will continue into the months ahead. Even so, we recommend finding ways to remind your employer or clients of the value that you bring to the table.
Figure 6: Maximize Your Value to Others
To this end, we suggest taking the time to shore up your professional skills or rework how you’re delivering value to your clients in a post-COVID world. Indeed, showing the value you bring to the table and demonstrating a willingness to up your game in this challenging environment may work to your benefit. Doing so may garner you more favor with your employer or clients and thus enable you to preserve your income throughout this uncertain economic time.
Now when it comes to investing, we believe that there are opportunities to be had in financial markets, but investors must be patient. The S&P 500 index has rallied 26% from March lows. However, this move is mainly due to a rally higher in tech stocks. More specifically, the NASDAQ-100 index of big tech names was recently a stone’s throw away from recouping this year’s losses. Even so, we believe that today’s risk asset rally has been predicated on investor misplaced expectations of a “v-shaped” economic recovery.
Figure 7: Markets Have Rallied but May Be Ready for a Pause
To be sure, for some investors, the reality is quickly setting in that a prolonged, uneven economic environment is on the horizon. Given few positive catalysts, growing political disharmony, and expensive asset valuations, we believe that markets as ripe for a pullback. In light of this outlook, you may have a chance in the coming weeks to maximize your risk-adjusted returns. Doing so may lead to potentially higher rates of return and better protect your savings from the ravages of inflation.
Be Proactive in Managing Risks and Seizing Opportunities
Any illusions of a quick fix to the coronavirus outbreak are fading fast. This new reality, coupled with waning confidence in fiscal policy, suggests economic conditions are likely to worsen in the coming weeks and months. Even so, we believe that you can take some steps right now to improve your ability to build enduring during this time. This begins when you have a thorough understanding of some of the risks and opportunities that lie waiting amidst a recession.
Hunkering down and expecting today’s events simply to pass will not only cost you but also put you further away from your critical financial goals. That’s why we believe that you’ll need to take a proactive posture right now to create and grow your wealth if your true aim is to pursue your life’s passions and purpose. These proactive steps include maximizing your value to others and making your money work for you throughout this time of economic and market uncertainty.