Upside Surprise To GDP Growth

On Friday morning, one of my favorite pieces of economic data was reported much better than expected.  The GDP Growth Rate (Quarter over quarter annualized) was reported at 5.7% vs. a 4.7% estimate.  This is also much higher than the last report of 2.2%.  Below is the S&P 500 (blue line) and the GDP growth rate (red).  This is one of the few economic indicators that is actually correlated with stock prices.  This indicator measures not how big our economy but the rate of change of growth.  Investors buy or sell stocks based on whether or not the economic growth is accelerating or decelerating.

You can see above that since 1998, the stock market has been very correlated to this number.  The stock market bottomed in March 2009 before the economy actually started to accelerate but leading economic indicators at the time were pointing in that direction.  It’s been up ever since.  In 2009, I was on television several times using a number of 5%+ for GDP growth.  Some agreed with me but most were shocked that I would say such a thing.  Here we are now in early 2010 with a reading of almost 6%.  I anticipate this number will peak at some point and start to head the other direction.  I could look similar to the 2004 & 2005 time frame.  The economy was accelerating in 2003 then began to slow down.  The are a few differences this time versus 2004.  First, the economy this time has expanded at a much faster clip and secondly I don’t believe this is the beginning of a multi-year bull market.

At the end of the day, the economy will begin to slow.  It will keep growing but just at a slower pace and I think the stock market will follow with more of a sideways choppy pattern.  But, for now, enjoy the better than expected report and potentially an oversold bounce.


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