Shapes of Recovery
The S&P 500 turned positive for the year during the third quarter despite dropping 34% from its all-time highs in February following the onset of the coronavirus pandemic. It took a mere 126 trading days to recover losses experienced during the bear market occurring from February 19th through March 23rd. According to Barron’s, the prior fastest bear market recovery happened in 1966-67 and took 310 trading days. The average recovery has spanned 1,542 trading days. It has been a true “V-shaped” recovery in 2020, and a quick one.
But, has it been a V-shaped recovery for all? While the broader stock market has indeed recouped its losses, a look under the hood shows quite a different story: a “K-shaped” recovery. What does that mean? Haves and have nots. Companies are experiencing two entirely separate paths depending upon their roles within the economy. For example, online retailers like Amazon and Overstock have greatly benefitted from Americans being stuck at home. Likewise for technology companies forming the backbone of how we now work and play remotely. Meanwhile, brick-and-mortar retail traffic is down, cruise liners are stuck in ports, few people are booking hotels, and energy consumption has waned (how many times have you filled up the gas tank since March?). A simple chart tells the story of the stock market’s K-shaped recovery… the haves and have nots:
The markets are not the only place facing a K-shaped recovery. Consider the broader economy. Most white-collar workers have been able to continue their usual responsibilities from home and are weathering the pandemic just fine, albeit with some minor inconveniences. Meanwhile, workers in industries like tourism and energy are bearing the brunt of the economic shutdown. Consider layoffs announced just over the past several weeks: Disney (28,000 jobs), Regal Cinemas (20,000 jobs), American Airlines (19,000), United Airlines (16,000), Shell (9,000 jobs), Marathon Petroleum, Chevron… the list goes on. It’s an odd dichotomy to see higher-wage workers largely living their normal lives, while food bank lines are growing in cities across the country.
What does this all mean? At some point, this K-shaped divergence – in both the stock market and economy – likely becomes unsustainable. There is an old saying that a healthy market is one where the troops follow the generals. Currently, the generals (namely tech stocks) are charging ahead, while many of the troops (most other companies) are hunkered down in bunkers.
On the economic front, the starkly contrasting experiences of workers on different ends of the spectrum usually manifests itself in some form – whether politically, growing civil unrest, or both. Rising inequality was a concern pre-pandemic and the last six months have only exacerbated the situation. Even putting inequality concerns aside (which is certainly a topic that can spark debate), consumer spending comprises nearly 70% of the country’s gross domestic product (GDP). An increasing chunk of the population without jobs and with diminishing spending power doesn’t bode well for either the stock market or economy.
Add to this that there is still considerable uncertainty over the future path of the coronavirus pandemic. Will there be a second wave? Will we get a vaccine? How long can companies hang on with the economy only partially open for business? The longer the pandemic stays with us, the shorter the lifespan of businesses, particularly smaller businesses. The shorter the lifespan for businesses, the more job losses pile up. This can quickly turn into an unsustainable, negative feedback loop.
So, what is the good news? Well, that brings us to the Federal Reserve, government stimulus, and the upcoming election. Policy makers understand the gravity of the situation. The monetary (Fed) and fiscal (government) response since March dwarfs anything previously witnessed in history, even in the depths of 2008’s Global Financial Crisis. Without these massive stimulus programs, the current situation would be much worse. In other words, the policy response has worked – and that’s a significant positive. With enough federal support, an economic recovery can take hold – and, in fact, may already be underway. The stock market certainly appears to believe so. The question is whether there will continue being enough support to see the economy through to the other side.
Currently, Congress is haggling over the specifics of the next fiscal stimulus package, with a growing federal deficit and upcoming general election looming. The financial markets are watching closely. The initial fiscal response in March, the CARES Act, helped bridge the gap for many individuals and businesses. However, without added support, a growing number will find it increasingly difficult to make ends meet – particularly if the pandemic stays with us for a while. The markets have become dependent on a one-two combination of Fed and government support. That’s not a negative if the economy can make it through to the other side.
While it’s a near certainty a sizeable fiscal package will be delivered soon, the exact shape of that stimulus could depend on the outcome of the election. And, what about that election? While elections (especially this one) can induce anxiety and short-term market volatility, the outcome will likely have minimal impact on longer-term market returns. If the past 150+ years tells us anything, it’s that who holds office doesn’t really matter to your portfolio. As the saying goes, “Vote at the polls, not with your portfolios”.
All of this is to say that while the markets have much to digest right now – K-shaped recoveries, a pandemic, the Fed, government stimulus, an election – the fact is we did get a V-shaped recovery in the broader stock market and other asset classes. By remaining disciplined throughout a chaotic 2020, investors are currently in a better position than before this all began. With a proper policy response and a waning pandemic, hopefully everyone will be in a better position in short order.