What We See for Recovery
By Luma Wealth on August 4, 2020
The ABCs of the Economy
You may be hearing forecasts about the shape of our economic recovery and wonder what this means. Will it be a U, V or W? The letter illustrates how the value of U.S. goods and services or GDP (Gross Domestic Product, a standard measure of economic strength) grows over time. When mapped out in a graph the path takes shape — and some letters are better than others.
In a recent Town Hall, Luma Wealth’s Chief Investment Officer, John Silvis, provided examples of likely scenarios based on current trends. He expressed reasons for optimism as some recent economic reports have provided better-than-expected results. For example, he pointed to the U.S. Composite Purchasing Manufacturing Index (PMI), which measures economic trends in manufacturing. Historically, a PMI above 50 indicates expansion and it was 55.8 (as calculated by Evercore ISI) in June. In addition, the unemployment rate, although high at 11.1%* in June, was better than expected.
What do we expect the economic recovery will look like? Here are the possibilities:
V-Shaped: This is the best-case scenario and what we hope for as it represents a short recession with a quick return to the pre-pandemic baseline. While this is possible, we believe it is not probable.
U-Shaped: After a steep downtrend, the economy rebounds a bit slowly, taking at least two quarters to recover. It is the next best possibility, and more likely than a V.
Swoosh (similar to the Nike logo): Just like a U-shaped recovery, the economy rebounds but much more gradually.
W-Shaped: This occurs when the economy takes a second downward turn, instead of continuing to improve, and is a possibility if there is a second surge in COVID-19 cases and another economic shutdown.
L-Shaped: In this scenario, unemployment persists and economic growth stagnates in a prolonged recession that lasts for years. At this point in time, a review of the numbers makes this pessimistic scenario seem unlikely.
Our recovery is largely tied to the number of coronavirus cases and development of a vaccine, so the situation remains fluid. We will continue to re-evaluate the numbers and our economic forecasts as the story unfolds.
While the cause of this downturn is extraordinary, we have been through recessions before and continue to take a long-term, diversified approach to investing. We are in this together, and believe that the strength of the Luma Wealth community will help us battle through the recovery, whatever its shape may be.
