Recoveries: The “U”; the “V” and Us.
The difference between U and V
When stocks rally after a crash due to an economic crisis (like this pandemic) the question is always: is this a recovery? Is this the end of the pain?
Stock markets lead for sure. But not all stocks recover in the same way and that of course, is what a whole bunch of people live to do: pick the fastest stocks to recover.
That is also what an investment advisory like BoA-ML does. Two lists from them: the ones to benefit from Covid19 events; and more interesting: the stocks that will lead the ‘recovery rally’.
All of this points to a “V” shaped recovery in stock prices; possibly a leading indicator of a recovery in stock performances, as well. And one should not confuse one for the other.
On the other hand is the widespread loss of jobs, the destruction of enterprise value, the time to recovery and the inability of many a business to survive all this. Those businesses might be unlisted but overall economic performance is the sum total of large and small; digital and legacy; listed and unlisted.
(We did are own bit of work on this, though in a slightly different context. You can see the set of videos on Sectoral Impact of Covid19 and Stressed Bank Portfolios here.)
Or is it?
The last few years have already been marked by growing inequality and the gap between haves and have-nots widening. The Brookings Institution reports here, that the top 1% of the USA owns 25% plus of the wealth in the USA. And totally, other reports suggest, that the top 20% of the US owns 80% plus of the wealth in the USA.
The same we know is true of concentration of wealth in the USA relative to other economies of the world.
(Some of you will be interested to know that Wall Street reported big bucks through trading profits in Q1 of Calendar 2020. In the spat between Donald Trump and WHO about who knew what and when, the US President need not look as far as China. Trading desks knew from their Asia dealers on the impending doom. Short positions were taken in New York, reportedly as early as January and February. So ‘yes’ to the ongoing shift of wealth.)
McKinseys’ late-2019 report on Superstar Firms, Sectors, Cities, gives enough pointers on the shift in wealth happening at a country-level.
We made this chart from the data put out by McKinsey in that report which gives you a glimpse of the point being made here.
So let us superimpose the economic recovery with the stock market recovery, accepting that the economy will recover with a slow ‘U” and the current thinking that the stock market may recover in a sharp “V”.
To the existing wealth gap, we will see new, incremental wealth gap. This is as the jobless continue to regain a foothold while the investing community participates, if not drives the recovery rally.
And of course, in any “V” shaped recovery, specific sectors and specific stocks will lead. And the 20% that has capital to invest, if it is not already invested in those sectors will see the benefits.
