As we begin to recover from the COVID-19 pandemic, you may hear about the possibility of a "K-shaped recovery." NEPC's Jennifer Appel, CFA explores what this means in today's NEPC Topic Talks.

1. BOSTON | ATLANTA | CHARLOTTE | CHICAGO | DETROIT | LAS VEGAS | PORTLAND | SAN FRANCISCO
UNDERSTANDING A
K-SHAPED ECONOMY
April 2021
Jennifer Appel, CFA
Research Consultant, Asset Allocation

2. 2
WHAT DOES THE K-SHAPE MEAN?
A K-shape refers to
the divergence in
different sectors,
industries, and
groups of an
economy following a
major economic
shock
The K-shape
highlights the
potential for an
uneven recovery and
greater inequality
within the economy

3. The COVID-19 recession and subsequent recovery has
exhibited K-shaped characteristics in two distinct ways:
THE K-SHAPE IN THE CURRENT ENVIRONMENT
3
Performance Divergence
Pandemic containment efforts
abruptly created a virtual
environment. Restrictions were
advantageous to industries or
activities that could persist in a
virtual world.
Recovery Trajectory
The unique nature of the
recession exaggerated existing
divides in the labor market and
wealth inequality. A continuation
in the uneven nature of the
recovery will likely impact the
economy’s long-term trajectory.
Smaller companies
Industries and companies relying
on in-person presence
Larger, more adaptable companies
Industries and companies with e-
commerce presence/capabilities
Part-time, lower income, lower
education requirement employment
Individuals and businesses with
smaller balance sheets
Full-time, higher income jobs and
industries that could easily adapt
to work from home
Individuals and businesses with
larger balance sheets

4. PERFORMANCE DIVERGENCE: INDUSTRY
4
Technology
E-Commerce
Software
Groceries
Healthcare
Online Services
The
Up
Leg
Travel/Tourism
Hospitality
Food Services
Manufacturing
Retail
Entertainment
The
Down
Leg

5. Market Cap Change
2019 - 2020
PERFORMANCE DIVERGENCE: COMPANY
5
S&P 500
Index
$31.7T
+18%
Face-
book
$778B
+33%
Apple
$2.2T
+73%
Amazon
$1.6T
+78%
Netflix
$239B
+69%
Google
$1.2T
+28%
Microsoft
$1.7T
+40%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2020 Price Returns
The
Up
Leg
Source: S&P, FactSet

6. PERFORMANCE DIVERGENCE: COMPANY
6
Source: NFIB Survey of Small and Independent Business Owners
The
Down
Leg
Do you think that six months
from now general business
conditions will be better than
they are now, about the same,
or worse?
Do you think the next three
months will be a good time for
small business to expand
substantially?
What do you expect to happen
to the real volume of goods
and/or services that you will
sell in the next three months?
Detailed Survey Questions
2010 2015 2020
Higher
Lower
2010 2015 2020
Better
Worse
2010 2015 2020
Better
Worse
80
90
100
110
2010 2013 2016 2019
Small Business Optimism

7. RECOVERY TRAJECTORY: THE LABOR MARKET
7
-25% -20% -15% -10% -5% 0%
Financial Activities
Utilities
Retail Trade
Transportation and Warehousing
Construction
Professional and Business Services
Wholesale Trade
Education and Health Services
Manufacturing
Government
Total Non-farm
Information
Mining and Logging
Leisure and Hospitality
Change in Employment by Industry
Source: Bureau of Labor Statistics; represents change from February 2020 to January 2021

8. Change in Employment 2019 to 2020
RECOVERY TRAJECTORY: THE LABOR MARKET
8
Wage Level
Educational
Attainment
Gender
Race/
Ethnicity
Lowest Fourth Second Fourth Third Fourth Highest Fourth
-7.9M -3.3M +0.6M +1.0M
Sources: Bureau of Labor Statistics, Economic Policy Institute, National Women’s Law Center
Change in Unemployment Rate 2019 to 2020
White Black Asian Hispanic/Latino
+2.8% +4.5% +4.1% +4.7%
Change in Unemployment Rate 2019 to 2020
Less than a High
School Diploma
+3.4% +3.4% +3.5% +2.0%
High School
Graduate
Some College or
Associates Degree
Bachelor’s Degree
and Higher
Change in Employment Since February 2020
Male Female
-1.8M -2.3M

9. The pandemic has magnified pre-existing wealth inequality
Fiscal and monetary responses have been impactful, but they are blunt tools
RECOVERY TRAJECTORY: WEALTH DISTRIBUTION
9
Individuals or institutions with
fewer physical and financial assets
Those with less savings; a smaller
financial safety net can make it
more difficult to pay bills or rent if
income is interrupted
Individuals or institutions with physical
and financial assets benefitted from
home price appreciation and the
equity market rally
White collar workers with minimal job
interruption, who may have enjoyed
lower expenses during the pandemic
$(5)
$(3)
$(2)
$-
$2
$3
$5
Billionaire Wealth
Gained
Labor Income Lost
Trillions
Source: Oxfam and the International Labour Organization;
Represents change in worldwide worker earnings and billionaire wealth during the COVID-19 pandemic
The
Up
Leg
The
Down
Leg

10. The “K” dynamic will likely shape tax and fiscal policy
New legislation will be aimed at lessening the divergence between groups
Pushing inequality to extremes may create political instability
The long-term labor market impact is uncertain
Will impacted jobs and industries return or are they permanently gone?
Will individuals become discouraged and leave the workforce altogether?
The duration of consumption and behavioral changes will
impact the recovery trajectory of the economy
Longer-lasting behavioral changes will likely benefit larger
companies, with tailwinds such as adaptability, easier access
to capital, and greater market share working in their favor
A robust economic recovery will take longer than average
LONG-TERM IMPLICATIONS & CONSIDERATIONS
10

11. INFORMATION DISCLAIMER
Past performance is no guarantee of future results.
The goal of this report is to provide a basis for substantiating
asset allocation recommendations. The opinions presented
herein represent the good faith views of NEPC as of the date of
this report and are subject to change at any time.
Information on market indices was provided by sources
external to NEPC. While NEPC has exercised reasonable
professional care in preparing this report, we cannot guarantee
the accuracy of all source information contained within.
All investments carry some level of risk. Diversification and
other asset allocation techniques do not ensure profit or
protect against losses.
This report is provided as a management aid for the client’s
internal use only. This report may contain confidential or
proprietary information and may not be copied or redistributed
to any party not legally entitled to receive it.
11