The shape of the economic recovery could range from a V shape at best, to a reverse radical shape in the middle, to a W shape at worst.
Which path the recovery takes will be determined by the virus trajectory, monetary and fiscal policy, and the amount of defaults, bankruptcies, and unemployment we see in the coming months.
The expiry of stimulus programs this summer will likely have negative effects on the economy.
Markets are rallying because we’re in a recovery; the question is what kind of recovery, whether markets have overdone it, and whether or not there’s a double dip on the other side of it, Ed Harrison said during today’s Real Vision Daily Briefing.
Harrison said that we’re seeing equity markets pricing a V-shaped recovery, but we could instead get a reverse radical shape (a sharp drop, small bounce back, then long period of subpar growth) or a W-shaped recovery, also called a “double-dip” recession. The latter two are his base case going forward, he said.
The difference between the reverse radical and the W shape will likely be determined by the virus trajectory, monetary and fiscal policy, and the amount of defaults, bankruptcies and unemployment we see in the coming weeks and months. Harrison said that bad news on any of those fronts could trigger the worst-case W-style recession.
He’s particularly concerned about the runoff of stimulus programs this summer, which will end forbearance protections, enhanced unemployment benefits, and more. Suddenly, people will have much less money to spend, and that could be devastating for the economy – especially as the jobs recovery appears to be stalling.
As far as risk goes, the biggest risk to the downside is in equities then high yield, which are both discounting a V-shaped or similar recovery. The bond market is discounting the reverse radical, and Harrison said he expects to see some bull flattening there as a result of any sort of downside risk to the economy.
None of the markets are pricing the W-shaped recovery, despite the very real possibility that we may see one.
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Originally published on Seeking Alpha