The financial markets will recover, but the two most important questions remain – when will it end, and what letter shape will it resemble when it recovers?
Recessions and recoveries come in different shapes and sizes. The four most popular shapes for recessions and recoveries are V, U, W, and L-shaped.
V-shaped recessions/recoveries are steep and fast to the downside. The ensuing rebounds are equally sharp and quick to the upside. A V-shaped recession and recovery is the least painful for the different shapes, at least from the perspective of the economy and financial markets. The recession of 2001, the recession of 1990-1991, and the recession of 1953 were your classic V-shapes.
U-shaped recessions/recoveries differ from V-shaped from two distinct aspects namely the speed of the decline is not as fast, and it requires a longer period to establish the bottom. The ensuing recovery is also at a slower pace to the upside. The recession from 1973-1975 - when the economy began to shrink and both unemployment and inflation were high – is a U-shaped scenario.
W-shaped recessions/recoveries begin as a V-shaped but then reverse direction turning back down showing a false sign of recovery. W-shaped is also referred to as “double-dip recessions” because the economy drops twice finally bottoming. This is very painful for investors and traders as they get hurt twice under this type of market condition. The recession of the early-1980s, which double dipped in 1981 and again in 1982 is often cited as a W-shaped recession.
L-shaped recessions/recoveries are the worst since they do not offer any hope of sustained recoveries. The decline is rather sharp and fast to the downside. Once a bottom is defined the recovery simply does not occur. The Japanese multiple asset class bubbles in the late-1980s led to a multi-decade deflationary environment. This was your classic L-shaped scenario.
In summary, the V-shaped scenario is the favored trajectory. The U-shaped recovery is the middle of the road. The most pessimistic are the W and L-shaped. Although the US economy and the US stock market have experienced many V-shaped recessions that resulted in sharp and fast recovers such as those during the recessions of the 1970s, 1980s, and 1990s there are also those recessions that followed asset bubbles in the late-1990 to early 2000s (i.e., dotcom) and the global financial crisis in the mid-to-late 2000s that led to a slow and drawn-out process of U-shaped recoveries.
Whether the COVID-19 Pandemic induced recession of 2020 will result in a V, U, W, or L-shaped recovery is any one's guess. However, all of these recoveries are bottoming processes, and as such there will be opportunities as well as risks for investors and traders alike. We suspect the Pandemic crisis will likely lead to a new market environment where specific sectors, industries, and stocks will follow their distinct V, U, W and L-shaped recovery paths.
Secular/structural growth sectors/stocks/stories/themes are likely to follow the paths of V-shaped recoveries. They are likely to be concentrated within many of the Technology, Healthcare, select Communication Services and select Consumer Discretionary names.
The cyclical growth sectors/stocks/stories/themes are likely to follow the paths of U-shaped recoveries. They are likely to be situated within the Consumer Staples, Real Estate, select Financials, select Industrials, select Consumer Discretionary, and select Utilities.
The W and L-shaped sectors and stocks are likely to be concentrated within Energy, Materials, select Industrials, select Financials, select Consumer Discretionary, and select Utilities.
Enclosed below is a list of large-cap S&P 500 names currently ranked by their SCTR scores. Remember the higher the SCTR scores the stronger the names. The top 10 SCTR scores are provided for each of the 11 major S&P 500 sectors. For the secular growth sectors such as Technology and Healthcare the top 20 ranked names have been provided, respectively.