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Smart Thought Of The Week: Alphabet-Soup

We can now add another letter to the bowl alphabet-soup and raft of symbols and shapes that experts are predicting the economic recovery will take. Not satisfied with “V”, “U”, “L”, “W”, “swoosh”, and “square-root”, they are now proposing the possibility that the recovery could be “K”-shaped.

They are trying their best to out-do each other to see which as-yet unused alphabet they can shoehorn into their narratives. What about “Y”, as in why bother?

With a “V”, experts reckon the economy could rebound as quickly as it contracted. A U-shaped recovery could take longer, while a “L” could mean the economy would not recover at all.

A “W” is self-explanatory – down, up, down, then up. A “swoosh” is just an extension of the “V”. And a “square-root” would imply a flatline after a recovery.

But unlike the other alphabets and symbols, a K-shaped recovery suggests that the economy is unlikely to recover in unison. Instead, there could be splendid winners but also hopeless losers….

…. In other words, the economy after COVID-19 could become even more bifurcated than before the pandemic struck.

The divergence between the winners and the losers is already evident in the way that shares have performed on the stock market, with technology, cloud, healthcare, and pharmaceuticals leading the charge.

Meanwhile, airlines, hospitality, tourism, and other discretionary-spending sectors have taken a backseat.

However, a K-shaped recovery is nothing new. No recovery after an economic downturn is ever smooth and uniform. That is not how capitalism works.

Investors will put their capital to work in sectors that could generate the highest potential returns. But when those returns start to look stretched, they will turn their attention to other industries….

…. We can call it whatever we like – tactical asset allocation, dynamic or even strategic asset allocation.

But it is just common sense. That is unless the economic recovery goes completely pear-shaped, which could happen if we don’t heed the warnings of COVID-19 and treat planet Earth with respect. Let’s stop destroying it. It is the only Earth we have.

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Disclosure: David Kuo does not own any of the shares mentioned.