With yesterday’s drop in the Dow Jones Industrial Average after many weeks of rallies, it is reasonable to question what’s ahead. Economists have been speculating about the recovery and whether it would be a “V”, a “W” or perhaps a “U” shaped recovery.

A Morningstar® article titled “The Alphabet Soup of Economic Recovery” (James Levin, 08-28-09) explains in layman terms, the differences between “V”, “W” and “U” -shaped economic recoveries. (Note: the article also discusses an “L” shaped recovery which is unlikely to happen.)

With a “V” shaped recovery, according to the article, “the economy sees a sharp decline, hits a pronounced bottom, and quickly turns upward, cancelling much or all of the losses that investors experienced on the way down.” The article made an argument that a “V”-shaped recovery was unlikely since “consumer spending remains soft, and the over-indebted consumer continues to feel the sting of depreciation of his greatest appreciable asset, his home.”

A “W” recovery starts out like a “V” but the upside of the “V” is followed by another market correction, a new bottom and then another upturn to finish out the “W”. The “W” can be a bonus or a bust for investors. For some, it brings a second chance to buy stocks at bargain prices. For many, however, of what we describe as “typical” investors, it provides a second emotional panic and selling at the bottom followed by buying as prices again rise higher (the wrong thing to do)!

A “U” shaped recovery according to the article: “is similar to the “V” differing only in that the upturn is not as defined, as the economy waffles at its lows for a lengthier period before steadily climbing to higher ground.”

The author expressed his belief that a “V’ was now unlikely, a “W” was a possibility but seemed to favor a “U” -shaped recovery the most.

Yesterday’s drop in the DOW could well be the start of the second “W” correction. Then again, we’re not economists, and even if we were, our advice would be questionable since few economists agree on much of anything. We are concerned, however, about the impact of future foreclosures and the possibility of a commercial real estate meltdown that many people fear may happen.

However, we’re pretty confident about one thing; we will see a recovery. But only time will tell whether it’s a “V” a “W’ or a “U” –shaped recovery. Who knows, it may even be something different!