For some stock market> pros history is the ultimate guide. These investors, who build sophisticated charts and graphs from years or decades of market return data, think stocks repeat certain behaviors during downturns and recoveries. This group call them chartists or market technicians have gained some notoriety lately as people look for any signs the worst is behind them. The current buzzwords: The stock market may experience a V, W, U or L shaped recovery. Don t worry if all that doesn t make sense to you. Below, we walk through five scenarios for how a recovery a technical one at least could take shape.
It s the most common type of recovery a V-shaped rebound last occurred during the bear market earlier this decade and the best-case scenario since it means the economy surges about as sharply as it plunged and returns to growth rates that preceded the crash. At the moment, the biggest obstacles to this type of an upturn are a glut of housing inventory, which keeps property prices down, and high unemployment, which can put the brakes on consumer spending. It's very difficult to build a case that the consumer can really be very accretive in terms of spending" under these conditions, says Jason Trennert, managing partner and chief investment strategist of Strategas Research Partners.
The last time we had one of these was the Great Depression. Back then it took World War II to get the economy back on track after a series of partial recoveries and market plunges of 20% or more throughout the 1930s. New York University economist Nouriel Roubini, whose pessimism earned him the nickname Dr. Doom, recently described how this would work today. It s possible, he says, we'll get "a double dip, W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates."
With our current recession now into its 17th month -- the longest since the Great Depression -- we're arguably in the midst of a U-shaped recession, not unlike the protracted slump from 1970 to 1974. Without the effect of the stimulus, key industrial indicators could "keep bouncing along off the bottom," stretching out the downside of this cycle, says Trennert. The U shape is a bit more subjective a judgment call, but it's defined by the time it takes to get growth back on track, and is at this point more indicative of where we stand. Barry Knapp, U.S. strategist for Barclays Capital, calls it a "little V" recovery, but either way, there's no boom in sight even when the worst is over.
Historians argue the U.S. has had only one of these, in 1945-46, when a postwar economy had trouble spurring increases in productivity, spending and expansion as civilian goods replaced tanks, munitions and warplanes. However, present-day Japan sums up an uncomfortably plausible scenario: After years of recession, it has neither fallen nor flatlined hence, the L shape.
This is the recovery profile most frequently invoked for the current crisis: The economy bottoms out, bounces back about halfway to the previous peak, and levels off for a while, giving the appearance of the mathematical square root symbol. The last boom was driven by credit. However, banks painfully discovered neither consumers nor big borrowers could afford to take on so much debt. That easy money isn t coming back. Prominent analyst Meredith Whitney predicts a $2 trillion withdrawal of credit by 2010. Jim Dunigan, chief investment officer of PNC Wealth Management, sees more frugal spending patterns emerging from that situation, leading to slowing future growth. "Right now, you've got a pretty sharp rebound that's then going to level out," he says.