What is a V-shaped recovery?

Definition and Example of a V-Shaped Recovery

A V-shaped recovery is a rapid and sharp improvement in the economy following a steep decline. On a GDP (Gross Domestic Product) chart over time, the decline forms the left side of the V. The recession is the lowest point, and then the rapid improvement forms from that point on the right side of the V.

How a V-Shaped Recovery Works

A V-shaped recovery represents a response to a short-term recession due to a one-time event. For this reason, it occurs faster than other types of recoveries. It takes longer to recover from a recession caused by more complex and structural issues.

Alternatives to a V-Shaped Recovery

Economic recessions and recoveries can take other shapes. There are many U-shaped recessions, where the decline lasts for several months while the economy works through a period of weakness. Some recessions show a slight improvement followed by another recession, which is referred to as a W-shaped recession.

What This Means for Individual Investors

When investors try to determine how long a recession will last, they should consider the reasons behind it. A recession caused by an asset bubble may last longer, but there may be good deals in the wreckage. If a recession is expected to last for several months, investors may want to shift to defensive stocks like food and healthcare companies. A V-shaped recession and recovery can happen so quickly that reorganizing a portfolio may be difficult. In this case, investors may prefer to hold their portfolio and watch what happens.

Key Takeaways

When looking at charts displaying the performance of economic indicators over time, the graphs sometimes form letter shapes. A V-shaped recovery occurs when there is a sharp decline in a recession followed by a sharp improvement. This can happen when the economic decline is due to a one-time slowdown. The most recent and deepest V-shaped recession in U.S. history occurred between February and April 2020, at the onset of the coronavirus pandemic.

Source: https://www.thebalancemoney.com/what-is-a-v-shaped-recovery-5221121

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