Posts Tagged 'GDP'

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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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.

 

 

This post published at www.karleggerss.com

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