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What Is a V-shaped or U-shaped Economic Recovery?

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The shape of the recovery has been one of the biggest keys to the coronavirus-riddled market recently.

Let’s dive in.

The V: Imagine a V-shape on a graph. The economy tanks down and then, once lockdowns end, economic growth immediately resumes its pre-virus rate. So if GDP growth was humming at 2% year-over-year in February, it would crater to 20% for the second quarter, as the country shut down, and then snap right back to 2% in Q3.

Had the market anticipated that, the S&P 500 would have recovered all of its losses already. Actually, the market is pricing in between a V and U-shaped recovery, having fallen 34% from its all-time high and then recovering to a level about 15% below its high.

The U: Again, follow this shape on a graph. Economic growth heads straight down well below 0% and then stays at that rate for some time, as businesses and states assess the decelerating spread of the virus, the accuracy of testing information and the risk of a reaccelerating rate of the infection's spread. And then the economy gradually recovers to its previous levels of output as the pandemic slowly fades.

Had the market priced in a U-shaped recovery, it probably would have remained at its March 23 low for a longer time than it did. But actually, the market ripped higher days after that low.

There are some that think we’re in for an ugly looking L-shaped recovery.

To see what the market is pricing in and how to approach your investments going forward, watch the quick video above. 

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