“Capital goes where it’s welcome and stays where it’s well treated.” ~ Walter B. Wriston, (1919-2005), Citicorp Chairman and CEO
Question: If GDP numbers are so bad, how can the stock market be doing so well?
Answer: Just as we can’t weigh something with a tape measure, it’s not fair to use a gauge such as the stock market to provide the same sort of quantifiable information as GDP (Gross Domestic Production). As a reminder, GDP is the monetary valuation of all finished goods and services made within a country during a specific period of time. GDP is a reported quarterly and is a historic snapshot of past behavior, not a predictor of future activity.
In contrast, financial markets represent and report the activity of publicly–traded companies representing various industries and sectors of the economy. Investors can buy and sell shares of these publicly traded companies. Some argue that financial markets are valuable indicators of innovation in the business environment.
The U.S. Bureau of Economic Analysis reported second–quarter 2020 GDP on an annualized basis as down 32.9% which covered activity for April, May, and June of 2020 while the economy was on lockdown, something we’ve never experienced before. This was the worst decline since the Commerce Department began tracking GDP in 1947. For comparison purposes, GDP fell 6.3% throughout the last quarter of 2008 during the financial crisis. Asian flu hit the U.S. hard during the first quarter of 1958 with GDP dropping 10.0% on an annualized basis at that time. The headline number is dreadful, yet the annualized number of -32.9% is as if the pace of decline occurred over four quarters. The year-over-year (YOY) decline was -9.5% for the second quarter of 2020 versus -1.3% for the first quarter YOY.
GDP typically runs between 2% – 3% on an annualized basis. As we evaluate and experience the future, it’s important to remember that there are four components of GDP:
- Government Spending
- Business Investment
- Personal Consumption
- Net Trade
Although the unexpected economic shutdown caused an extraordinary drop in GDP, future GDP numbers will depend on our efforts to contain the virus, the virus itself, fiscal support, consumer spending and confidence.
Beginning Thursday, March 12, 2020, the Federal Reserve digitally created and injected $2.9 Trillion of new money through Friday, June 12, 2020. As a benchmark, quantitative easing from the Fed between late 2008 until the end of 2010 totaled $1.4 Trillion. Fiscal support does provide liquidity to a fragile economy. The challenge then and now is to get the money circulating, otherwise known as the velocity of money.
In his press conference, Federal Reserve Chairman Powell said, “The fiscal policy actions been taken thus far have made a critical difference to families, businesses, and communities across the country. The path forward will also depend on policy actions taken at all levels of government to provide relief and to support the recovery for as long as needed.”
COVID-19 shutdowns slowed the exchange of money for goods and services. We’re beginning to see an increase in spending as pent-up demand by consumers who were unable to spend in March and April. Much of what future consumer spending looks like will be determined by the number of new cases of COVID-19, which seemingly is peaking in many states and potential fiscal initiatives.
Consumer services were hit hard in March and April. Restaurants and air travel have picked up from the April lows. Routine healthcare visits have risen following cancelations in March and April. Consumer spending in these areas still remains far below where we were in February.
There’s an old Wall Street adage that money goes where it’s treated well. Cash levels are high while interest rates and the velocity of money remain low. Money needs to go somewhere and much of it has found its way into financial markets. It will take time for the economy to recover as we place our focus on protecting our health and improving the economy. At a time when there are more questions than answers; pent-up demand, supply chains and consumer spending will likely influence the future velocity of money. Another consideration is the next round of fiscal stimulus. As this is being written, debates over this are taking place in Washington D.C. This is a time to stay focused on your goals, objectives, needs, and personal risk appetite. Stay focused and invest accordingly
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.
There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results. The opinions expressed are those of the writer as of August 5, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. Information obtained from outside sources is believed to be reliable but cannot be guaranteed as such.
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