by K. W. Callahan

Created on: August 26, 2009   Last Updated: December 05, 2009

Why will the upcoming recovery be W-shaped? The answer is simple. Unless you have been living under a rock the last several months, you've probably noticed how the slightest newsworthy headline can send the markets soaring upward or diving for cover. The current economy is so touchy it only takes the most minor of good or bad economic related news, or even hint thereof, to spark a rally or cause a massive sell off. Therefore, it appears that the road to recovery is going to be a rocky one, with the path looking more like a rollercoaster ride at your nearest theme park than any sort of normal W shape.

This wild ride can be illustrated by the dips and rises in mortgage rates over the last year. We only have to look back one year to remember when 30-year fixed mortgage rates were hovering right around 6.5%. By the end of 2008, they had dipped violently down to around 5%, dropping even further as 2009 began before suddenly bouncing back to around 5.5% and then starting to slide again. As uncertainty around lending, housing and credit markets abounds, look for rates to continue to bounce in this W-shaped fashion.

For further support on a W-shaped recovery theory, we can look to the stock and energy markets. While the staggering three, four and five-hundred point market swings from 2008 and $140 a barrel oil prices have subsided for the moment, we see traders, economists, and market analysts alike debating whether a recovery has actually begun. This state of uncertainty among market professionals is bouncing the markets around like ping-pong balls in a lottery drawing. Everything from Fed comments to a not so severe increase in unemployment, and every rumor or whisper in between are viewed with interest, hope, speculation, longing, and desperation. Investors are looking for some sort of indication of recovery from these signs, and thus the markets are fractured along battle lines drawn between those investing in what they see as the beginning of a recovery versus those who continue to profit take from what they see as a continued recession. And as long as these two sides continue their war of attrition, look for a twisting route of W-shaped hills and valleys as we bump along the road to recovery.

Then there is the housing market. Just what is planned by this wolf in sheep's clothing remains to be seen. A calm, cool, collected path to recovered home values and sales, using tools such as tax credits, short sales, and a zero Fed rate, to avoid potholes along the way? Possibly. Another wave of foreclosures and a massive drop in existing home sales and values due to a new bubble of mortgage resets hitting over the next several years? Possibly. Throw into the mix, looming defaults on credit card balances, the possibility of hyperinflation, and a whole slew of unknowns ranging from the ever-present threat of skyrocketing energy prices to that of a terrorist attack or natural disaster, we see that the economy remains precariously balanced. Sitting as if on the point of a triangle, it awaits the slightest shove to send it cascading either toward the start of a recovery or back into continued economic sluggishness.

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