What is a K Shaped Recovery? From an “L,” a “W,” or a “V,” economists look to the alphabet to describe the economy. However, ever since 2020, we’ve experienced one somewhat concerning letter: the K-shaped recovery. What is that? Is it another candlestick pattern we must learn? Read more to learn how this recovery could be happening as we speak.
A K shaped recovery follows a recession. It happens due to different parts of the economy recovering at different times and magnitudes. And when you think of it that way, this is in direct contrast to an even recovery across sectors, whether industry or groups of people.
Beyond the irregular recovery at the surface, we have a far greater effect deep below the surface. The economy and society’s fundamental structure is impacted at its core before and after a K shaped recovery.
When charted, you can see the different parts of the economy diverge and take on a K-shape, with one rising and the other declining.
If we’re going to learn how the stock market works, then we need to understand a recovery like this one.
K Shaped Recovery Breakdown
In case you didn’t know, we have other letters besides K to describe economic recovery. Take, for example, L, V, U, or W; they all reflect variables such as GDP or total employment. All of these variables are broadly correlated across almost all sectors of the economy.
What makes a K-shaped recovery different from the types of recovery listed above is its unevenness. And we don’t have to look far to identify one.
A case in point is the K-shaped recovery re-emerged after the sharp recession following the COVID-19 pandemic. We saw an uneven recovery that spanned all sectors, industries, and even groups of people.
While some parts of the economy saw a booming recovery immediately following the recession, others remained sluggish or, worse yet, continued to decline.
Concerns
What exactly does all of this mean with a K-shaped recovery? It can mean that some industries will quickly return to pre-pandemic growth and economic strength.
Or values of specific types of assets will rise while others continue to fall. Beyond that, the divide in wealth widens, with the rich getting richer and the poor getting poorer.
One obvious area of concern is the dichotomy of the stock market vs the real economy, especially considering that the top 1% of earners owns 52% the market.
These conditions don’t have to be mutually exclusive; sometimes, we see all three, such as in the COVID-19 aftermath.
K Shaped Recovery Factors
When you look below the surface of a K shaped recovery, several phenomena may be at work. For starters, look no further than the disruption of new technology and industry throughout a recession.
Also known as creative destruction, it’s one of the more interesting factors at work during our recovery from the pandemic.
A V for Some
Why don’t you take a closer look at the letter “K?” You’ll notice the top is a “V” and the bottom is an inverted “V.” Industries like technology, retail, and software services are blazing the path of creative destruction and find themselves at the top of the V.
For proof, look no further than Tech companies like Apple and Microsoft. Both industry giants saw earnings explode during the last recession.
Along with the same token, retailers like Costco, Walmart, and Target make sizeable gains. And we can’t forget online entertainment giants Netflix, YouTube, and Disney, which boomed due to people looking for ways to entertain themselves while at home.
And, of course, companies like Slack and Zoom that enable us to work from home have thrived. However, it wasn’t all rosy for those in the travel industry and traditional entertainment venues. Airlines and movie theatres were effectively shut down, many permanently. Make sure to watch for the K shaped recovery.
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An Uneven Recovery
- Just recently, Michael T. Snyder, the publisher of The Economic Collapse Blog, released a list of economic facts that are not only startling but disturbing.
- All 546 Regal Cinema theatres in the United States are shutting down, with no reopening timetable.
- AMC Entertainment (the largest U.S. movie theatre chain, reported they’d “run out of liquidity” in only six months.
- The average rent in San Francisco is 20.3 percent lower than in 2019.
- General Motors indicated that the number of vehicles delivered in the third quarter was down 10% from the previous year.
- JCPenney indicated it would cut close to 15,000 jobs as we approach the busy holiday shopping season.
- Last month, 787,000 Americans filed new unemployment claims in one week.
- Overall, in 2020, more than 60 million Americans have filed new unemployment benefits claims. This is the highest amount on record.
- So far, in 2020, bankruptcy filings have risen 40% in NYC.
- This number is hard to believe, but close to 90% of bar and restaurant owners in NYC couldn’t pay their full rent for August.
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K Shaped Recovery Bottom
Distressingly, the bottom half of the K shaped recovery is where most of the economy lies. Its recovery, however, is questionable as the fallout of the pandemic drags on.
With the shift to work-from-home arrangements, many companies question their need for expensive real estate. Furthermore, those roles that previously filled associate and administrative tasks become less critical.
As independent working rises in popularity, the risk of these jobs becoming obsolete is real.
The need for “less” on all fronts during the employment recovery drives the bottom part of the “K” shape.
At the same time, employers realize they can hire highly qualified talent for less money. For example, many outsource work to third-world countries where labor is significantly cheaper.
On the lower arm of the K are hourly workers. These workers are likelier to hold jobs requiring face-to-face interaction, such as hospitality, retail, and entertainment.
Sadly, these industries have been hardest hit by the lockdown. I’d be remiss not to mention young people, whose jobs are often first to be axed in a downturn. To a large extent, they are also overrepresented in the bottom half of the K.
10% at the Top of the V
On the upper arm of the K-shaped recovery are higher earners, homeowners, and companies that can easily operate remotely or have capitalized on new pandemic-linked trends. And now, the top 1% owns more than half of all stocks and mutual funds.
One of the easiest ways to envision our current K-shaped recovery is by looking at the stock market’s surge since late March.
However, the “stock market” no longer represents the underlying economy. With massive fiscal interventions from the Federal Reserve, speculative “risk” in assets has been pushed to historic levels.
The stock market soared to new highs despite the nationwide failure of businesses and unemployment surging.
Final Thoughts: K Shaped Recovery
It’s clear that those who sit at the top of the “K” are experiencing a “V”-shaped recovery. If you have money to invest or trade, you’re likely in the upper-arm of the K shaped recovery or closer to it than you think.
Better yet, even if you only have $50 a week to spare for trading, it may surprise you that it can build wealth over time with prudent investing. Take action! An inch of movement will bring you closer to your goals than a mile of intention.
