Long Term Effects of a K-shaped Recovery on Your Investments

The economic recovery from the Covid-19 crisis is turning out to be a classic “k-shape.” In a k-shaped recovery different parts of the economy recover at different rates or perhaps not at all. The question of investors is what are the long term effects of a k-shaped recovery on your investments? This year tech giants like Apple and Microsoft have done very well as the world pivoted to working and staying at home. Travel and hospitality businesses have done poorly and are not recovering anytime soon. What does this situation tell us about the long term for investing?

What Is a K-shaped Recovery?

Investopedia explains what a k-shaped recovery is and why it matters. During a recession, economic performance generally falls across all sectors although some sectors may be hit worse than others. And, when the economy recovers, all sectors tend to join in at varying rates. What makes a k-shaped recovery different is that some sectors promptly begin to recover like the tech sector in 2020 while other sectors like hospitality and travel continue to fall. The questions for investors are if the climbing sectors will continue on their path and when the falling sectors will recover, or if they ever will.

Long Term Effects of a K-shaped Recovery on Your Investments
Where Are Your Investments on This Chart?

What a K-shaped Recovery Means for Your Investing

Those who stayed in, or purchased, big tech in early 2020 have done very well during 2020. Extremely low interest rates have helped as has the pivot to working at home and social distancing brought on by the covid-19 pandemic. Going forward, there should be some concern about how long big tech can continue their current rate of gains. We are seeing increasing concern about big tech monopolies that could lead to breakups. And, when interest rates start going again, it will tend to put a damper on rapid stock market growth. For the falling sectors of the market, the general expectation is that there will be an eventual recovery. But, companies without sufficient reserves or credit may simply go out of business or be taken over for pennies by their competitors. Investors will need to accurately pick the survivors who will benefit from a world free of covid-19 and renewed economic growth. That will require more than glancing at a k-shaped recovery graph and the use of intrinsic stock value as a guide going forward.

Economic Stability or the Lack of It for Your Investments

The Financial Stability Board issued a report regarding stability and the covid-19 crisis.

Global financial conditions have overall continued to ease since the G20 meeting in July on the back of the decisive policy action taken earlier this year. However, risks to global financial stability remain elevated. Financial conditions may remain vulnerable to sharp shifts in investor sentiment. Deteriorating credit quality of non-financial borrowers poses risks to the financial sector. The intensification of the pandemic, together with the resulting necessary government containment measures as well as greater uncertainty about its duration, is increasing vulnerabilities in the non-financial sector.

Loan losses experienced by banks will affect future credit availability and investor sentiment may swing to the negative if investors believe that the stock market party is over. The huge amounts of government debt coupled with “zombie company” debt create investment risks going forward. Investors who have profited from the tech rally in 2020 may benefit from taking a little off of the table while those who have avoided dull consumer goods stocks and utilities may benefit from accepting lower investment returns in order to provide a little investment security.

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