Markets are betting on a V-shaped recovery. Is that wise?

The economy’s prospects are yoked to efforts to contain the Covid-19 virus. Recovery from a nasty case typically involves repeated setbacks. We may see a similarly ‘Covid-shaped’ economic revival, writes James Moore

There are signs the lockdown is working, but is a rapid economic bounce back likely? (Getty)

There’s been a whiff of optimism on the markets this week, despite the run of historically bad economic indicators we’ve seen and the continuing rise in the Covid-19 death toll.

The FTSE 100 reached its nadir on 23 March, when it closed at 4,994. A brief rally followed, one that looked very much like a “dead cat bounce”. For those who haven’t come across that typically lurid piece of City terminology, it describes the muted rise in share prices seen at the end of a plunge as the short sellers close out their positions and book their ill gotten gains, while a few speculators start to nip at shares in the hope of taking advantage of cheap prices.

The improvement in the FTSE and other markets in the last couple of days has, however, been driven by a word we’ve not seen much sign of recently: hope. The thinking is that maybe the pandemic is slowing, the lockdowns are working, and if this is true, that maybe the economic stimulus packages enacted by various governments, (including the UK’s) will result in the fabled V-shaped recovery.