Investment Experts Warn of a K-Shaped Recovery

Investment experts say the economic recovery that is beginning after the COVID-19-induced downturn could be K-shaped, meaning it would benefit some members of society, but others—mostly lower income people who have less to begin with—will not fare nearly as well.

“We are in a K-shaped recovery,” says Devin Miller, chief executive officer and co-founder of Secure, a fintech startup that seeks to address the emergency savings problem facing Americans. “We hear benefits leaders and brokers talk about designing for two types of employee groups. One is older, more professional and more established in life, with technical or professional skills and jobs that can be done remotely. The other group is younger, less established and does not have a lot of assets to rely on. These workers are in much more vulnerable and expendable roles. Our view is that those who are most likely to be on the downward slope of the K are at risk of a downward spiral, as things get tight financially.”

However, Jason Vaillancourt, co-head of global asset allocation at Putnam Investments, says he is optimistic that those on the downward slope of the K-shaped recovery can rebound as the vaccine helps Americans get back to work.

He notes that in January, approximately 10 million people were unemployed, and 90% of the jobs that were lost were in the service sector—with approximately 70% of those jobs in two categories: education and health services, and leisure and hospitality.

“We believe those are jobs that can return as vaccines are rolled out and the United States begins to approach herd immunity in the second half of the year,” Vaillancourt says. “Our expectation is that we are in the early stages of a strong cyclical recovery, fueled by powerful fiscal and monetary stimulus, pent-up demand and a strong consumer balance sheet, in aggregate.”

Vaillancourt says he is bullish on value, small-cap equity, developed and emerging non-U.S. markets and commodities.

Strong Outlook for the Economy Overall

Even amid concerns about the potential for an unequal recovery, investment experts have fairly strong outlooks for the economy and the markets in 2021, due to the distribution of the vaccine and pent-up consumer demand.

Tony Roth, chief investment officer (CIO) at Wilmington Trust, says, “As we enter 2021, [the] gap between our 12-month economic outlook and equity market valuations is starting to close, and we find the backdrop of an improving economy and a supportive Federal Reserve to be one of the most constructive for equities since before the pandemic hit. Promising vaccine developments and expectations for accelerating productivity growth are leading to a broadening of equity market strength in different regions and more cyclical areas of the market. The structural shift toward digitization in all areas of the economy means growth equities—particularly in the U.S. and emerging markets—remain a compelling investment over a multi-year horizon.”

However, Roth says, with President Joe Biden’s plans and a Democratic-controlled Congress, the United States could see higher taxes, more regulation and sweeping policy changes that could weigh on corporate profit margins.

Rhea Thomas, senior economist at Wilmington Trust, says that, last year, the U.S. gross domestic product (GDP) growth contracted by 3.5%. This year, Thomas expects GDP growth of 3.5%—if the government provides additional stimulus. “It also depends on the path of the virus and the vaccines,” Thomas adds. In particular, she is bullish on U.S. small cap and emerging market stocks.

Jack Janasiewicz, a portfolio strategist with Natixis Investment Managers, expects the S&P 500 will perform the most strongly in the next 12 months out of all the indexes, and he also agrees that small-cap stocks are likely to outperform.

Esty Dwek, global market strategist with Natixis, says she favors growth over value stocks—and she foresees a secular bull market that will last a few years.

Last year, manufacturing stocks performed well, Dwek says. As the economy begins to ramp up in 2021, “there is still plenty of room for the service industries to catch up,” she says.

She is also optimistic that the Biden administration will provide additional stimulus money and that this will help stock market returns.

Thomas says she does expect something of a K-shaped recovery in which higher earners will fare better than lower-paid workers. “We could see a slowing of employment for lower income people,” she says.