It’s Not About Absolutes

Many people focus on GDP and the absolute level and then they try to buy or sell stocks based on that.  It’s not about if GDP is positive or negative, it’s about the rate of change.  Today’s GDP (QoQ annualized) was reported at a -1.0%.  The estimates were for -1.5%.  The average investor will look at these numbers and say how horrible, our economy is still contracting. 

But, let’s look at this further.  Below is a picture going back 10 years with GDP QoQ annualized (red) and the S&P 500 (blue).  You can see that instead of asking if the economy is growing or not, the question should be is the rate of change of GDP improving or not.  That’s what making money in the stock market is all about.

sp500 vs gdp rate of change

The fact that unemployment is still rising, foreclosures are still rising, consumers still aren’t spending, and banks still aren’t lending doesn’t correlate with the price of stocks.  There are so many other factors.  One of those is how fast the economy is improving or contracting.  In the fall of 2008, the economy was contracting at a rapid rate.  GDP was contracting at a rate of over 6% (annualized).  Today’s report of -1% shows that while still a bad economy, it’s improving.  You can see from the chart above, that’s what the stock market has been discounting.

The next question is whether or not that red line continues to rise.  I think GDP will actually continue higher and we’ll get a positive reading over the next few months (perhaps over 2%).  That leaves the S&P will plenty more room on the upside.  Obviously it won’t be a straight line.  But, I think we’ll work our way higher the remainder of the year.

As for today, this number could be a buy the rumor, sell the news event.  In addition, there were some disappointing pieces of economic data.  Personal consumption was much lower than anticipated.  Mixed data may give the bulls some pause today, but ultimately all of these numbers will continue to improve over the next few months.



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7 Responses to “It’s Not About Absolutes”

  1. 1 hedgefundofone July 31, 2009 at 9:43 am

    The fundamentals moving positive are certainly important. On these extended hard-driving trends, it appears to me that we often get the corrections “in place” or with somewhat sideways movement drifting upwards. I.e., the gaps against the trend in the morning are all the correction that traders may get until the trend finally ends. In strong bullish trends, morning gaps down against the trend seem to occur often, inviting sellers and shorts, then trapping the shorts who have to convert to buyers as price moves against them–adds fuel to the next move up. However, at the end of the day, when the buying has moved prices even higher, the gap down does not even look important. It is almost like a limit-up market in some ways. This also makes it very difficult for pure mutual fund investors/traders in 401(k) plans to find a dip to buy, as the closing prices they get in their funds reflect very little of any dips. I have been able to buy call options to grab the upward movements, and short the shares at the end of the day, then take profit on the shorts the next morning on the gap down and let the calls march upward again as the gap down is closed. However, my 401(k) sits in money market or conservative bond fund. Just cannot get a handle on it.

    • 2 keggerss August 2, 2009 at 9:05 am

      I just slow the trading down on that part of the portfolio. I’m getting the ones I oversee more heavily invested. They were mostly cash in 2008 and did fine. So, I’d say 401-Ks are just on a different time frame.

  2. 3 tom July 31, 2009 at 12:20 pm

    you have a level in mind to start looking at TBT here on this pullback. I don’t see how the stock market can continue to run and interest not get over 4%.

    • 4 keggerss August 2, 2009 at 9:07 am

      I don’t have a level. I really don’t see any sort of edge in trading this right now. I agree with your comment on interest rates going up as the market goes up.

  3. 6 tom August 3, 2009 at 8:36 am

    Karl, is it just me or do we just create one bubble after another. Watching the trading in these markets it looks like we are just entering another bubble phase.

    • 7 keggerss August 3, 2009 at 9:11 am

      It sure seems like it Tom. I think they (the governments) think that’s the best way out of this is to create another bubble. Asset bubbles make people richer and feel better. Unfortunately, there’s a price to pay down the road. We’ll enjoy it now though.

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