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Shape of the economic recovery and what’s next for investors

Results from April 21, 2020 survey. Click image to enlarge.

Last month we asked you to participate in our survey on the Shape of the Recovery. Thanks for taking the time to give us your prediction. The results are displayed in the bar chart to the right. You look like experts!

For months before Covid-19 hit, valuations and earnings expectations were getting very high. By the end of December 2019 many portfolio managers had become more defensive, increasing their allocations to more conservative assets. Then Covid-19 arrived, triggering a global recession.

L-Shaped Recovery

From their enthusiastic highs in mid-February 2020, global equity markets plunged and by March 23 had declined over 30 percent in some markets including the TSX. The massive selloff and liquidity crunch in March also affected fixed income. Bond markets were totally chaotic. The reality of a global pandemic had registered! During this period the price of oil collapsed, with Saudi Arabia and Russia clashing over production quotas. At that point, the markets were pricing in a dire scenario with an L-shaped recovery – basically a recessionary collapse with little economic activity expected for the next 12 to 18 months.

U-Shaped Recovery

As the indiscriminate panic selling subsided, the equity markets started to stabilize and move off the March lows. Share prices for the top ten technology companies surged. Many of the remaining stock prices oscillated, in some cases declining again to retest their March lows. Supported by unparalleled central bank interventions and government relief programs, by the end of April it seemed that the markets were pricing in more of a U-shaped recovery.

V, W or Square Root-Shaped Recovery

There is still hope for the best-case scenario, the V-shaped recovery. Sentiment rises on reports of successful vaccine research and then recedes quickly with announcements of bankruptcies and escalating US-China trade tensions. Some are hopeful but question the near-term sustainability of the April gains in equities and believe the recovery will take the shape of a W. (I’m in that camp.) Others see a recovery followed by a period of slow growth, in the shape of the square root symbol. Still many unknown unknowns!

Swoosh-Shaped Recovery

Although opinions vary widely as the story unfolds, the predominant view is that the recovery will take the path of the Nike swoosh. Canadian economist David Rosenberg pictures it as a Swoosh interspersed with numerous small Ws along the way. He is suggesting the economic recovery will be slow, marked by frequent periods of high volatility. (His nickname is “Rosie”, but his predictions rarely are!) His timeframe for recovery is at least one year, maybe 2. He expects low interest rates and deflation for the next two years followed by inflation, noting that in the Great Depression inflation rose to 5%.

Whatever the time frame for the recovery, there are reasons to be optimistic. Economies are reopening and with each day there is more clarity regarding the nature of the virus and the depth and severity of the recession. The narrative in the media is turning from the virus to speculation about the new normal – what will it look like and what will really change. No one knows yet. Trends underway before Covid-19 are likely to continue but at a more rapid pace and with some new and unexpected twists. For the markets there is an estimated $4.7 trillion USD in cash on the sidelines. When this cash is invested, it will propel equity prices higher.

Factor-Based Investing

Last fall as we explored “Investing for the Next Decade” we looked at the factors that contribute to investment success. These factors provide guidance as we review portfolios and strive to maintain the right balance between preservation and growth of capital. At this point in the economic cycle we are seeing signs of the move out of the current recession into a new economic cycle. The factors shown below help us to frame the discussion.

Click image to enlarge.

Typically leading us out of a recession and back to more robust growth are the smaller, value-oriented companies. In the current environment it will also be the high-quality companies that have the resources to grow their business through the acquisition of competitors or complementary businesses.

What’s the next step?

In a recent interview Thomas Caldwell, Founder of Caldwell Securities, noted that “there is no news, only opinions” about the future, and investors need to quell their emotions and always view the present as an opportunity. We do not yet know the real depth or severity of the economic damage, but opportunities do exist. It’s time to look again at how your portfolio is positioned to meet your needs and objectives.

Click to enlarge image.

With the above factors in mind, think about how you want your portfolio to be positioned 2-5 years out and start to move in that direction now. Particularly during times of uncertainty it is beneficial to apply the barbell approach – strike an appropriate balance between defensive and offensive assets. We don’t know what life after lockdowns will bring, but with interest rates close to zero you’ll need to see some growth in your portfolio to achieve your life vision and sustain the lifestyle you desire. Don’t allow fear to get in the way of a bright future.


In my next blog I’ll be providing an update on different sectors and how you can use ETFs for sector-specific investing. Until then, stay safe and continue to do your part flattening the curve.


The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Fraser & Partners Investment Services of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

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