Thinking Outside of the V-Shaped Recovery Box

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The entirety of the financial media and many on Wall Street believe a V-shaped economic recovery is in our future. While I hope they are right, it would be foolish to take such analysis and, quite frankly, unwarranted optimism, at face value.

If history teaches us one thing, it is that significant, life-altering events are rarely if ever followed by a quick return to normality. In this article, I raise a few considerations to make you reconsider popular economic narratives. The importance for investors to think outside of the box cannot be overstated. Or to put it another way, the parameters of “the box” have likely changed and, if so, we should be cognizant of those changes in our decision making.

If the future economic recovery does not resemble the “V” shape that the financial markets are depending on, the stock market may be even more over-valued than we think. To that end, consider the following graph showing where the S&P 500 could trade based on a range of historical valuations.

Short-term prognosis

The COVID-19 crisis may be short-lived. Although it seems as though progress is being made, there is nary a sign that a full-fledged cure or vaccine is at hand. Social distancing and mass closures of commercial enterprise appear to slow the exponential spreading of the virus considerably. While very effective in saving lives, those measures come with immense economic costs. The productive output of the global economy has ground to a near-total halt.

As the virus appears to have peaked in Asia and is starting to show signs of peaking in Europe, I am hopeful the U.S. will also peak shortly. Then what? From a health standpoint, the answer depends on whether a cure or vaccine is discovered.