July 31, 2020

Normal Good

Real gross domestic product (GDP) decreased at an annual rate of 32.9% in the second quarter of 2020
Bureau of Economic Analysis.

I’m not an economist, although the economy plays a big part in my research and its impact on risk. But I’ve always found that in my studies of the world’s stock markets there has never been a time when trends of stock prices couldn’t also be correlated to the trends of social mood. This is because social mood is primarily an outgrowth of changing views in popular culture. These include art, film, music, fashion and sometimes politics, which lately is more embraced than the first four mentioned. This would suggest a declining stock market to anyone who observes the magnitude of the country’s current divide. But it’s the divide that is important in my research and analysis. Because the current contributors to social mood are more likely to view this week’s releases of GDP data from the point of view that the world is ending. This is where economics become a better focus on the current state of the broad markets and why I think normal is the only acceptable outcome.

For the financial community it’s never been a more challenging endeavor, nor a more interesting one, making sense out of economic data that by all measures suggests we’re in a depression. Except this is a depression we created in a snap, and therefore raises the probability we may resolve just as quickly . First of all, the decline in GDP was an annualized number representing the data accumulated in the second quarter of this year, when the pandemic and the economy collided. So what happened? Real GDP declined to a 32.9 percent annual rate, and while easily characterized as the worst in post WW2 history, it was still less than economist predictions and reflected what was well within expectation in the face of a government sponsored lockdown of the economy. Sponsored because at the same time the economy was sinking, stimulus and Fed promises of historically low interest rates were actively focused positives. Namely, within the real output posted was the sharp rise in disposable income, which we all know helped to finance the reopening that is still in its early stages. 

The contradiction in conditions suggests in my opinion that the likelihood of a sharp rebound for the 3rd Quarter will help work off some of the damage done to the economy in the 2nd. Although I assume economists will get their forecasts wrong, I prefer to look at the future impact not the result and both suggest maintaining involvement in the markets while not ignoring the challenges to further reopening over the medium term. It’s a challenge that smacks of uncertainty and requires a degree of caution as well and that’s where taking some profits and adding to value actively which also fits the current strategy.

Final Note
Immediately following the congressional challenges faced by the CEO’s of four of the largest technology companies in the world were strong earnings, needless to say the sector finished the week decisively higher with Amazon (AMZN), Facebook (FB) and Apple (AAPL) leading the pack. The latter even offering the investor a 4 for 1 stock split. As for the current debate in Washington regarding the next stimulus package, in my opinion there will be one coming and it will contain the additional compensation to the unemployed most likely closer to $600 than $200. Stimulus is positive for those with an outlook of more favorable economic data. Either way I wish the overall package were more transparent as the size of the bill unfortunately suggests many pieces beneficial to both private and political ambitions. Lastly, the growing confidence that a vaccine to fight the virus is inevitable, there is much to consider when the distribution of said vaccine is determined, suggesting normal is highly likely still at least 6 months away. In the meantime, we can let the markets keep score for us. 

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