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K-shaped Recovery Investments

There continue to be high hopes for a V-shaped recovery for the U.S. Economy and a V-type stock market recovery. However, with the U.S. and the world facing the potential for a second wave of COVID-19 infections this winter and the uncertainties surrounding the U.S. presidential election, many believe that it is hard to imagine a V-shaped economic and V-type stock market recoveries.


The letter recovery that is gaining traction is the tale of two different recoveries, or commonly referred to as the K-shaped recovery. Unlike the other letter-shaped letters that describe the path of an economic recovery (L-shaped, U-shaped, W-shaped, and V-shaped), a K-shaped occurs when, following a recession, the economy and the different sectors in the economy recuperates unevenly. Various parts of the economy and income groups recover at different rates, times, or magnitudes. The two separate trajectories resemble the two arms of the letter "K."


In a K-shaped recovery, it is common to see parts of the economy displaying strong growth while others continue to languish with little or nominal growth. The growing inequalities across the country and the economy is visible by looking at the dramatic surge in the stock market since the late-Mar 2020 bottom, as compared to the economy. While the market recorded new all-time highs, the U.S. GDP plunged to levels not seen since the Great Depression, and unemployment levels rose into double-digit levels.


In the stock market, the K-shaped narrative is gaining considerable traction. Looking at how COVID-19 has affected the world this year and how the global lockdowns have impacted our lives, it is reasonable to expect a K-shaped recovery is the likely recovery narrative. The emerging and leadership stocks today are the story of the changing economy and the rapid evolution of a new society that focuses on the work from home and the virtual work and life environment. The gap between the winners (haves) and losers (have-nots) since the pandemic has created a paradigm shift toward a pent-up demand for technology, cloud services, internet, e-commerce, digital payments, cybersecurity, social media services, and work-from-home technology-related solutions.


While the pandemic has thrown investors a curveball, many have quickly adapted to the changing market dynamics. Those that have participated in the sectors and the stocks that focus on a K-shaped recovery have done well. So, the question then becomes will this trend be sustainable and longer-lasting even after the post-COVID-19 pandemic?


Exchange-Traded Funds and thematic investment funds have also jumped on this investment theme with ETFs and Mutual Funds. On the Mutual Fund side, the following funds aim to capture the new investment trend: Kemper Technology Fund – Class A (KTCAX), Franklin DynaTech Fund Class A (FKDNX), Janus Henderson Global Technology and Innovation Fund Class A (JATAX), and T. Rowe Price Global Technology Fund (PRGTX). On the ETF front, two newly launched ETFs offer exposure to companies across the technology realm that seek to capture the essence of the work from home and the virtual work and life themes. They are Direxion Work from Home ETF (WFH) and the iShares Virtual Work and Life Multisector ETF (IWFH).


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

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