INVESTING WITH CLARITY® BLOG

Recession to Recovery…LUV Will Get Us Through

March 31, 2020 10:28:44 AM

For those who seek to find a silver lining in every cloud, we look for positives to come from bad situations. Recessions are no different. Economic contractions are always tough to swallow, especially when we are in the midst of one. Here are our thoughts, both Good and Bad, on what history will likely refer to as the “Coronavirus Recession.” The Bad News is that we are on the cusp of seeing the worst economic news on a percentage change basis ever. The Good News is that it will all be rearview mirror looking and investors will be focusing on the future and not the past. The Good News, as we see it, is that the Recession that we are in is neither Structural nor Cyclical in nature, but rather has been caused by unforeseen outside sources.

Here is the acronym, L.U.V., presented in a fashion that associates the type of recession with the recovery:

  • L-Shaped Recoveries – typically arise from what we refer to as “Structural” based recessions. Think of the Great Depression of 1929-1937, Great Financial Recession of 2007-2009 and the four inflation-driven recessions from 1970-1982. They all had the common factor of a deep-rooted financial system failure that caused or abetted them. The Banking and the Credit Markets in essence were perceived to be on the brink of failure. These structural recessions have what we refer to as “L-Shaped” recoveries and take years, if not decades, to recover. We believe that is not the case today, as Banks are better capitalized than ever, and the Fed, the Congress and the Administration have promised to “have their back,” as we say.
  • U-Shaped Recoveries – typically arise from what we refer to as “Cyclical” based recessions. Think of the Recession of 1991, 2001 and the three mild recessions that occurred between 1953-1960. These are caused by an overheating economy and the Fed raising rates above the limit that, with hindsight, they should not have. The recoveries following are typically “U-Shaped” in nature and take six months to one year before the Economy normalizes. This recession does not exhibit these characteristics either.
  • V-Shaped Recoveries – typically arise from what we refer to as “Exogenous Shock” based recessions. Think of the Cuban Missile Crisis, the 1968 Political Crisis/Vietnam War, 1987 Crash and the 9/11 attacks. All of these events were Black Swan in nature and could in no way be foreseen. Each crisis leads to extraordinary levels of heightened fear and mindsight that the world is ending. In all cases, we were not in a recession before the shock nor were we coming out of one (9/11 attacks), and this attributed to each resulting with a “V-Shaped” recovery.

So how do we see the ultimate recovery from the Coronavirus Recession? Using the acronym L.U.V., do we believe this will be “L-Shaped”, “U-Shaped” or “V-Shaped”? We pose the following:

  • Going into this Event we had a vast labor shortage. Will some jobs go away? Most likely, but for those that work in the service industry and are flexible, once we have this virus behind us, opportunity will present itself, albeit coming in different shapes and sizes.
  • In our estimation, pent-up demand will be fierce, swift and quick. Yes, we face changes in how we distance ourselves in public, but we will make concerted efforts to visit loved ones, take that vacation we had foregone and, in essence, spend money on things once again.

The Good News is that previous recessions depicted by such characteristics have swift recoveries associated with them, known as “V-Shaped” recoveries. In summary, the collective mind of stock investors is always forward thinking and never focuses on past data. We would simply suggest that one not be dismissive of forthcoming negative economic data, but be vigilant in keeping it in the proper perspective. In closing, just like Love gets us through personal tragedy in most cases, look to this recovery to exhibit the letter V in the acronym L.U.V. as to its shape coming out of the backside.

– Invest With Clarity®


Chuck Etzweiler

Chuck Etzweiler

MBA, CIMA®, CFP®, CMT, Chief Research Officer & Senior Vice President

With more than twenty-five years of investment industry experience, Chuck directs the on-going research efforts of the firm, much of which help both advisors and clients understand the philosophy and strategy of Nepsis, Inc. in a deeper manner. A high percentage of the focus of the research is centered around money manager pitfalls, investor short-comings and repetitive behavioral biases that detract clients from earning optimal returns.

Prior to joining Nepsis, Chuck worked as Chief Market Strategist for True North Global Research and as a Securities Analyst with both Wells Fargo and the Bank of Hawaii. Additionally, Chuck has earned the CFP designation and is a Chartered Market Technician. Chuck is a graduate of Syracuse University and also has earned his MBA in Finance.

Chuck is an active member of the CFA Society of Minnesota, the Market Technician’s Association and the Investment Management Consultants Association.

Chuck was raised in Allentown, PA and now lives in California with his wife and two sons.

Email: cetzweiler@investwithclarity.com

 

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