The K-Shaped Recovery is Under Way

A Practical Summary

• The economic recovery unfolding in the US is neither U-shaped nor V-shaped … it’s best expressed as a “K-shaped recovery,” with two Americas diverging
• For wealthy Americans who are in the top income quartile, and who own significant financial assets, the recession is effectively over: incomes, employment, and (yes) even their kids’ math homework are better than ever
• Poorer Americans who are in the bottom income quartile, and who are living in the Northeast, west coast, or in some of our large cities, are still trying to navigate through the economic carnage of a once-in-a-generation economic hardship
• Small businesses have not recovered to January levels, and in fact since June small business revenue is flat / down

There has been speculation in the financial press about the speed and sustainability of the current economic recovery. Most of the conversation has been a debate between two letters of the alphabet.

Bears posit that this recession will be “U-shaped” … it’ll be a grim, prolonged slog, with depressed economic activity and elevated unemployment, for another 12–24 months. They have been arguing that the world economy won’t recover until months after the development and distribution of a COVID-19 vaccine. They have greeted recent market rallies with skepticism, seeing them as false starts or “bear market rallies,” and point to historical precedents such 1929, 1937, 1973, 1980 and 2008. For those with long enough memories (or, like me, access to historical economic data courtesy of the Federal Reserve of St. Louis), there was also 1796 and 1815.

Bulls on the other hand think that this will be a “V-shaped” recovery, with markets and supply chains quickly adapting to new realities. This group thinks that the economies of the world are now rebounding sustainably after a brief but sharp decline caused by state-imposed stay-at-home orders which were designed to buy time to flatten the pandemic’s infection curve. As companies and institutions adjust, corporate earnings and the stock market will recover faster and further than the naysayers predict, driven in part by forward earnings expectations and in part by government-induced stimulus.

The K-Shaped Recovery

Anyone who read my post, “When Is the Buying Opportunity?” (published fortuitously just as the markets bottomed on March 24th) knows that I’m a bull, with…