V.U.L. – 3 letters you need to understand when trading in the COVID-19 times. These letters will be the visualization of possible recovery scenarios of the world economy after governments will triumph on the pandemic. They are easy to remember and very useful tools for your trading strategy and capital management techniques. So what are they and how can you understand them?
There is no crystal clear definition, but please do consider the following article as a guideline with no fixed timeframes.
Once the outbreak was looming only in China, this type of market recovery was what every market analyst was hoping for. With the outbreak affecting only China, and only with some few externalities around the world, this forecast projected for the negative economic impact to be over within the first quarter of the year 2020.
Well… the virus spread faster than anticipated in every corner of the globe, and governments turned their hopes to the only effective containment technique we know, the quarantine. Hence, we faced a world-wide recession, and the bid for a recovery now was challenged by a larger battlefield.
The V-shaped recovery scenario would portray the current large economic decline, followed by an immediate jump back.
So, hypothetically this scenario would require the world to just pause for a moment to deal with the pandemic – all infrastructure, supply, orders, and jobs are still there. Once we rapidly go back to usual, the negative outcomes will be confined in the second quarter. Hence, the third quarter will be business as usual, and all shall be forgotten.
The White House, optimistically projected that the economy will bounce back strongly and swiftly, with a partial economic reopening beginning as soon as next month, May 2020.
However, such a scenario holds very few odds since workers are not expected to resume business as usual, as restrictions on travel, requirements for public hygiene and rules that govern people's density for indoor spaces at the same time are likely to remain in place.
This scenario is quite similar to the above mentioned, but it reflects a longer lockdown period. As many countries hesitate to reopen their economies, the time standing at the bottom of the declining graph increases. Obviously, the longer economies stay in lockdown, the more lasting market comebacks will be.
The positive assumption of this scenario foresees that when economies are in lockdown, and people are quarantined, there is a high probability for a pent up demand (unusually strong demand following a period of decreased spending). This will push a quick economic recovery. This scenario predicts business to be shut down through most of the second quarter, and an increased growth during the third quarter. Hence, by years end the world shall be back to normal.
More and more analysts are now projecting a U-shaped recovery.
"Hopefully it will be sooner rather than later," JPMorgan Chase CEO Jamie Dimon said Tuesday during an earnings conference call. "But it won't be May. We're talking about June, July, August – something like that."
This is an alarming scenario. If economic lockdown will continue for a long time, businesses will not survive. With the known fact that a cure and vaccine will take months, if not years, to hit the markets, social anxiety will keep consumers away from shops. Thus, economies will not find support in consumerism. Instead, they will turn to debt.
Massive accumulated debt will withhold economic recovery and will push inflation. The L shaped graph indicates that the economy struggles to recover after a large decline. In this scenario, it could take years for the economy to jump back in levels that it was months ago. Until then our dear rollers, focus on innovative market and consumerism trends. Innovation in human behavior and social mechanisms will have positive effects on growth.