What is a ‘K-shaped’ recovery?

By now, most of us have seen at least two exceptionally large economic downturns in our lifetime. And, we also know that after a downturn comes the talk about what kind of recovery we will see:

“I think we’ll see a ‘V-Shaped’ one.”

“No, this will have a lasting impact, it’ll be an ‘L-shape’ recovery.”

Throw in a ‘U’ and a ‘W’, and these tend to be the four types of recoveries that economists, talking heads and everyone in between discuss ad nauseam.

What we have seen over the past couple of months is much more interest in the ‘K-shaped’ recovery. Those chartists amongst you will be scratching your heads and wondering how it is possible for a recovery to have two separate prongs of a ‘K’, going both upwards and downwards, it sounds a bit like hedging one’s bets on the recovery.

We all know that a ‘V-shaped’ recovery is the best and what we want after a downturn. It implies that economic activity and spending will quickly pick up after a sharp drop-off, and snap back in the shape of a ‘V’. This is like that of a ‘U’ shaped recovery, which is more protracted but a recovery, nonetheless.

The ‘L-shaped’ recovery is much more severe and not much of a recovery at all. There is a long period of high unemployment and low spending, resulting in default on debt. This is likely to lead to a deep depression and no quick snap back normality.

The ‘K-shaped’ recovery is somewhat a mix of both:

The line heading upwards symbolises parts of the economy that have benefited from the pandemic. Tech stocks in particular have performed extremely well, Amazon hiring an additional 100,000 workers a few months back. Apple reaching a staggering $2T valuation, Zoom taking over our lives and Microsoft continuing as the juggernaut it is. Entertainment stocks like Netflix and Alphabet (YouTube) have done extremely well and pharmaceuticals such as Merck, AstraZeneca and Moderna have also outperformed.

The line heading downwards just about covers everyone else. Those companies which have fared far worse and continue the fall downwards. Hospitality and travel such as BA, EasyJet, Ryanair continue to suffer with layoffs and bankruptcies picking up apace.

This opens wider questions about whether this recovery will be unevenly distributed, as was the talk after the Great Recession, whereby increasing wealth disparity. It is also worth noting that some sectors will not recover at all. After black swan events like this there will be real lasting changes that will all become normal. This isn’t to say there will be post-apocalyptic-like changes; these things will likely be minor shifts in behaviour, things we are already starting to see.

In simplistic terms, if we must assign a single letter to the recovery then the ‘K-shape’ fits the mould. From here, as an investor, the questions then begin as how best to position a portfolio to navigate this?