Alphabet soup: Is the ASX 200 in for a V-shaped COVID recovery or rolling Ws?

A V-shaped market recovery following COVID-19 is less likely than “rolling Ws”, says Chief Investment Strategist at Charles Schwab.

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A V-shaped market recovery following COVID-19 is less likely than “rolling Ws”, says Liz Ann Sonders, Chief Investment Strategist at Charles Schwab.

Sonders recently shared her thoughts on the COVID-19 market performance and outlook via an article on the Charles Schwab website. 

Disconnect between the share market and economy  

Sonders stated that the No. 1 question she is fielding lately relates to the “disconnect between the stock market and the economy.” 

Certainly, the disconnect is present in the Australian share market too, with the Australian Financial Review (AFR) reporting on 3 June that the ASX 200 remained “unfazed by recession talk as it hit a three-month high.” 

The market participants’ rose-tinted outlook prompted JPMorgan Asset Management’s Global Market Strategist, Kerry Craig to infer that, “if the economic data remains weak for the moment, markets are likely to continue to discount that as being backward looking.” 

However, Craig identified a risk; that markets are “pricing in a lot of good news that might not materialise in the second half of the year.” 

Indeed, the S&P/ASX 200 Index (INDEXASX: XJO) is currently trading largely flat, with Victoria reinstating certain restrictions amid second-wave fears. 

Related to Craig’s worry, Sonders stated that second half will grant: “clarity on the depth of the economic contraction via both the second quarter earnings season… and the initial read on second quarter real gross domestic product.”  

The upcoming earnings season and updated gross domestic product figures may very well send the markets on a W-shaped rollercoaster. 

Shares lead the economy

Investigating recession data post-Second World War, Sonders found that, with the exception of 2001, “the stock market’s peaks and troughs have pre-dated the economy’s peaks and troughs.” 

Sonders further stated that there is a “fairly consistent history of the stock market’s peaks and troughs coming at or before the peaks and troughs in the economy.” 

This, for Sonders, confirms the view that “the stock market is a leading economic indicator.” 

Sonders also mused that she will closely monitor investor sentiment, “near-term market peaks and troughs are often defined more by investor emotions than economic data.” 

Takeaways for ASX 200 

NAB’s own CEO, Ross McEwan echoed Sonders’s thoughts on the shape of the recovery, with the AFR releasing an article titled: “McEwan backs more stimulus, tips W-shaped recovery.” 

A W-shaped recovery will require a more circumspect investing approach and a sturdy constitution to handle the likely-lively ride ahead. 

In an important caveat, JPMorgan’s Kerry Craig offered the following:

“If we’re heading for weaker growth and lower inflation, investors need to look for companies that can protect margins long-term, hence security selection is more important right now than the top down macro narrative.”

Sonders herself concluded that “the stock market probably got a bit ahead of itself in pricing in a V-shaped recovery.”

The positive news about flattened curves across the globe and encouraging headlines regarding vaccines may have spurred the V-shape recovery thesis. 

Therefore, Sonders thinks that “stocks may continue to be at the mercy of virus-related news — in both directions.”

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