M, Not V, Shaped Factor Recovery

Summary

• Many letters have been thrown around to describe the anticipated shape of the economic recovery following the COVID-19-induced decline.
• 'V', the most optimistic, 'U', 'W' and 'L', the most pessimistic.
• Signs that the economic downturn is starting to ease focus on a second derivative perspective.

Research Signals - May 2020

Many letters have been thrown around to describe the anticipated shape of the economic recovery following the COVID-19-induced decline, such as 'V', the most optimistic, 'U', 'W' and 'L', the most pessimistic. Signs that the economic downturn is starting to ease, as seen for example in the slightly softer contraction in J.P.Morgan Global Manufacturing PMI, focus on a second derivative perspective.

While the risks and uncertainty remain high on the ultimate shape of the recovery, equity investors took a more positive stance that the worst may be behind us, assigning an 'M' for momentum to their desired trades last month, setting aside a short-lived V(alue)-shaped recovery the prior month, as lockdowns were loosened across many regions (Table 1).

• US: High quality firms, such as those gauged by Fixed Assets Turnover Ratio, joined high momentum names as the top performers among large caps, while small cap investors turned to analyst outlook for guidance from measures such as 3-M Revision in FY2 EPS Forecasts
• Developed Europe: Rational Decay Alpha and Book-to-Market depicted the prevailing theme of momentum factor outperformance at the expense of value, respectively
• Developed Pacific: In markets outside Japan, high risk names continued to outperform throughout the duration of the pandemic, as measured by 24-Month Value at Risk
• Emerging markets: Small caps, captured by Natural Logarithm of Market Capitalization, outperformed alongside high quality and momentum names

Table 1

Comments

[Paul T. Lambert]

It looks to me like an O-shaped recovery -- that is, all sorts of people with vastly different opinions arguing in circles and not getting anywhere. Whatever will be, will be!

[toolman2]

Yep. This virus particularly feeds on the sick, weak, lame, and stupid--overall. More's comin'.

[MrMidas]

Buffett, Icahn, Cuban all on the sidelines. Me too. What will happen, who knows? But things aren't normal. The stock market itself is running on fumes. We have a dysfunctional administration, and there are a lot of black swan eggs ready to hatch. Next GDP could be a whopper of a reality check.

[pizzathehut]

To put it simply, it feels like we are putting a mask over something that is more damaged. it works and you can get by but for how long until someone lifts the mask to see what you are hiding. The recovery was fast and I'm happy for that but when the dust settles what will be the impact of it? We do not know and when but it sure does feel like something is off and it's just a matter of when. I still see restaurants and local shops recovering from covid and then more hit by the riots. They are getting pinned up against a wall with no way out but to close but I could be wrong

[xaghra]

I suppose that economist must justify their salaries and that it why you posted this dribble...
To compare 2019 stats with present day stats is to be polite: laughable...
The true figures for 2020 will not be known for many years with revisions along the way...

@Value Digger
As for WB. I am expecting a retracement to at least 2800 and possibly 2200. If WB doesn't invest some of his cash in the SPX at that time, WB will be dead by the time values reach
his criteria, and when values do reach his level, he will hesitate !!! Just look at what he did with his airline stocks...He lost faith in America... Worse, he lost faith in mankind. This same mankind that made it possible for him and many many others to be able to live past their 90s: not just a few lucky ones...

[Value Digger]

Unemployment rate is at a historically high 13.3% today versus 3.5% in Q4 2019.

However, SPY is today where it was in Q4 2019.

In other words, the big disconnect between valuations and fundamentals in Q4 2019 has become tremendous in Q2 2020.

This is why Warren Buffett is staying on the sidelines....

[Florian Steinberg]

@Value Digger : You will be proven wrong, in my opinion. If the virus does not make a vicious comeback, the economy will be good enough going forward. I already see normal activity everywhere.

[User 48680200]

13% unemployment, many businesses and individuals not paying rents, riots everywhere, bankruptcies starting , Fed printing money like there is no tomorrow, budget deficits through the roof?
This is not normal activity.

[coop0021]

This is the part a lot of ppl are missing.....the economy was not that great before the virus, even if it looked that way. Growth had stalled, debts were high, and the Fed could barely raise rates without shocking the markets lower. Asset prices were and are being propped up, that's all. The virus was a pin popping a bubble...and the Fed/Treasury doubled down on printing/blowing up the debt. If we were not a world reserve currency, or still had a gold standard etc, then none of this printing would be possible without imploding the whole economy.