We’ve been sceptical of the recent consensus about a “V-shaped” economic recovery. During the last bear market and recession, the early consensus was the same–that there would be a “V-shaped” recovery. But then, as the economy and market continued to deteriorate, the recovery became “U-shaped” then “L-shaped” and then finally just a long, slow slide into oblivion (and that was a shallow recession).
Specifically, in this current recession, we think earnings estimates for the back half of the year are still too high and that the damage to the “regular” economy caused by the housing slump and credit crunch is only now beginning to play out. And we note that, in the recap of today’s disappointing retailer earnings, worrisome PPI, and spiking oil prices, the “V-shaped” talk is starting to morph into “U-shaped”:
“There is still a lot of overhang in the financial system and the economy,” said Douglas Peta, chief investment strategist at J.& W. Seligman & Company in New York. “We are more likely to experience a long U-shaped bottom than a V-shaped bottom that we all hope for.”
Fed vice chairman Donald Kohn now has a similar take in the FT:
While financial markets have “improved somewhat” there were still many signs of stress. Markets were unlikely to normalise quickly because of the extent of the structural changes that would have to take place, he argued. Those processes “are likely to be slow and they may be set back from time to time”.
Mr Kohn said growth would probably firm from the second half of the year onwards. But “a number of factors suggest that the recovery could be relatively moderate”.
We hear that “second half recovery” theory a lot, too.