There is a lot of speculation regarding the economy’s projected recovery. Politicians, economists, and investors are analyzing market trends to predict a V-, U-, or W-shape recovery. Although the S&P 500, Nasdaq, and DJIA are at or near all-time highs, representing a V-shape, this does not reflect the overall state of the economy. There is still a high volume of unemployment claims every week, potentially reflecting a U-shape recovery. Finally, there is the constant threat of a second COVID-19 wave having another drastic impact leading to a W-shape recovery or “double-dip recession”.
With the United States’ financial markets achieving all-time highs in recent weeks after one of the biggest financial market drops in history, these events represent a V-shape recovery. This is when a rapid decline into recession territory is followed by a rapid recovery. This may seem encouraging from the surface, however, this could be a reflection of big business and not the overall economy. Big corporations in technology have pushed the Nasdaq to an all-time high from capitalizing on the rapid shift to employees working from home. Additionally, large retailers such as Costco Wholesale (COST) and Walmart (WMT) recently reported greater-than-expected quarterly earnings as they were easily able to adapt to an e-commerce platform and were allowed to remain operational. Many small businesses were forced to shut down while others are continuing to struggle. Furthermore, the unemployment rate remains high with a large volume of new unemployment claims each week.
As the stock market seems to be experiencing a V-shape recovery, unemployment seems to be telling a different story. The 3rd week of June marked 13 continuous weeks of unemployment claims over 1 million. While the S&P 500, Nasdaq, and DJIA are flirting with all-time highs, unemployment continues to worsen. Unemployment appears to be on the path of a U-shape recovery. This is when there is a rapid fall followed by a period of stagnation over several economic quarters before recovery can start to be observed. This was most recently examined during The Great Recession when unemployment did not recover for roughly 5 years while financial markets recovered after roughly 2 years.
With discussion on the horizon of a second COVID-19 wave, there is a potential the United States’ financial markets could retreat from near-all-time highs reflecting a W-shape recovery or “double-dip recession”. This is when a sharp decline is followed by rapid recovery, followed by a rapid decline, and ending with another rapid recovery. In this case, the middle section of the “W” will be the result of additional economic crises such as lockdown, additional small business failure, and failed stimulus amongst other possible events.
In the current climate, a V-shape in US stock market indexes is representing the future of big business and not reflective of the overall economy. Unemployment claims continue to remain high every week, showing little, or no recovery. Additionally, there still remains a lot of uncertainty regarding the United States’ policy if there is an unfavorable impact from a second COVID-19 wave further damaging unemployment, small and large businesses.