From an “L,” a “W” or a “V,” economists look to the alphabet to describe the economy. However, in 2020 we're experiencing one letter that is somewhat concerning, the K shaped recovery.
What is that? Is it another candlestick pattern we must learn? Read more to learn how this recovery could be happening as we speak.
Understanding the K Shaped Recovery
- A K shaped recovery follows a recession. It happens as a result of different parts of the economy recovering at different times and magnitudes. And when you think of it that way, this is in direct contrast to an even recovery across sectors, whether it is industry or groups of people.
1. What Does a K-Shaped Recovery Lead To?
Beyond the irregular recovery at the surface, we have a far greater effect deep below the surface. The economy and society's fundamental structure is impacted at its core before and after a K-shaped recovery.
2. Why The K Shape?
When charted, you can see the different parts of the economy diverge and take on a K-shape, with one rising and the other declining.
If we're going to learn how the stock market works, then we need to understand a recovery like this one.
Breaking Down a K Shaped Recovery
- In case you didn't know, we have other letters besides K to describe economic recovery. Take, for example, L, V, U or W; they all reflect different variables such as GDP or total employment. In fact, all of these variables are broadly correlated across almost all sectors of the economy.
What makes a K shaped recovery different from the types of recovery listed above is it's unevenness. And we don't have to look far to identify one.
Case in point, the K shape recovery re-emerged in the wake of the sharp recession following the COVID-19 pandemic. We saw an uneven recovery that spanned all sectors, industries and even groups of people.
While some parts of the economy saw a booming recovery immediately following the recession, others remained sluggish or, worse yet, continued to decline.
1. Concerns With the K Shaped Recovery
What exactly does all of this mean? It can mean that some industries will quickly return to pre-pandemic growth levels and economic strength.
Or, values of specific types of assets will rise while others continue to fall. Beyond even that, the divide in wealth widens, with the rich getting richer and the poor getting poorer.
One obvious area of concern is the dichotomy of the stock market vs the real economy, especially considering that 52% of the market is owned by the top 1% of earners.
These conditions don't have to be mutually exclusive; sometimes, we see all three, such as in the COVID-19 aftermath.
2. What Factors Drive a K-Shape Recovery?
When you look below the surface, several different phenomena may be at work. For starters, look no further than the disruption new technology and industry has throughout a recession.
Also known as creative destruction, it's one of the more interesting factors at work during our recovery from the pandemic.
3. A V for Some, Not for Most
Why don't you take a closer look at the letter "K?" You'll notice the top is a "V" and the bottom is an inverted "V." Industries like technology, retail, and software services are blazing the path of creative destruction and find themselves at the top of the V.
For proof, look no further than Tech companies like Apple and Microsoft. Both industry giants saw earnings explode during the last recession.
Along with the same token, retailers like Costco, Walmart and Target also make sizeable gains. And we can't forget online entertainment giants Netflix, YouTube and Disney, who boomed as a result of people looking for ways to entertain themselves while at home.
And, of course, companies like Slack and Zoom that enable us to work from home have thrived. However, it was not all rosy for those in the travel industry and traditional entertainment venues. Airlines and movie theatres were effectively shut down, many permanently.
An Uneven Recovery: Startling Economic Facts
- Just recently, Michael T. Snyder, the publisher of The Economic Collapse Blog, released a list of economic facts that are not only startling but disturbing.
- All of the 546 Regal Cinema theatres in the United States are shutting down, with no reopening timetable.
- AMC Entertainment (the largest U.S movie theatre chain, reported they'd "run out of liquidity" in only six months.
- The average rent in San Francisco is 20.3 percent lower than it was in 2019.
- General Motors indicated the number of vehicles delivered in the third quarter was down 10% from the year prior.
- As we approach the busy holiday shopping season, JCPenney indicated it would cut close to 15,000 jobs.
- Just last month, an additional 787,000 Americans filed new unemployment claims in one week.
- Overall, so far, in 2020, more than 60 million Americans have filed new unemployment benefits claims. This is the highest amount on record.
- So far, in 2020, bankruptcy filings have risen 40% in NYC.
- This number is hard to believe, but close to 90% of bar and restaurant owners in NYC couldn't pay their full rent for August.
1. What About Those at the Bottom of a K Shaped Recovery?
Distressingly, the bottom half of the K shaped recovery is where the majority of the economy lies. Its recovery, however, is questionable as the fallout of the pandemic drags on.
With the shift to work from home arrangements, many companies question their need for expensive real estate. Furthermore, those roles that previously filled associate and administrative tasks become less critical.
As independent working rises in popularity, the risk of these jobs becoming obsolete is real.
The need for "less" on all fronts during the employment recovery is very much a driving force shaping the bottom part of the "K" shape.
At the same time, employers realize they can hire higher qualified talent for less money. For example, many outsource work to third world countries where labor is significantly cheaper.
On the lower-arm of the K are hourly workers. These workers are more likely to hold jobs requiring face-to-face interaction, such as hospitality, retail and entertainment.
Sadly these industries have been hardest-hit by the lockdown. I'd be remiss not to mention young people, whose jobs are often first to be axed in a downturn. To a large extent, they are also overrepresented in the bottom half of the K.
2. What About the 10% at the Top of the V?
On the upper-arm of the K are higher earners and homeowners, as well as companies that can easily operate remotely or have capitalized on new pandemic-linked trends. And now, the top 1% owns more than half of all stocks and mutual funds.
3. The Stock Market Recovery
One of the easiest ways to envision our current "K" shaped recovery is by looking at the stock market's surge since late March.
However, the "stock market" is no longer representative of the underlying economy. With massive fiscal interventions from the Federal Reserve, speculative "risk" in assets has been pushed to historic levels.
Despite the nationwide failing of business' and unemployment surging, the stock market soared to new highs.
Where to Go From Here?
Currently, it's clear that those who sit at the top of the "K" are experiencing a "V"-shaped recovery. If you have money to invest or trade, you're likely in the upper-arm of the K or closer to it than you think.
Better yet, even if you only have $50 a week to spare for trading, it may surprise you that it can build wealth over time with prudent investing. Take action! An inch of movement will bring you closer to your goals than a mile of intention.