Despite Grim Headlines, Stocks Rose Sharply -- Why?
(Friday, July 31, 2020; 8:00 p.m. EST) This morning, new figures on the economy were splashed across the full width of front pages of newspapers across the country. But if you have been following our weekly updates, the unprecedented plunge was not news.
Economic activity, also known as gross domestic product (GDP), collapsed at a 32.9% annualized rate last quarter. The consensus forecast of economists before the GDP release Thursday morning by the U.S. Commerce Department had been for a second-quarter plunge of -31.9%.
The GDP collapse was in line with expectations, as measured by The Wall Street Journal's survey of 60 leading economists in early July. Point is, though the plunge was big news three months ago, the off-the charts front-page coverage was out of synch with the financial news investors care about now.
The consensus expectations of economic experts is for a 15% rebound in the third quarter and a 6.8% annualized growth rate in the final quarter of 2020. That's the news investors care need to know now.
Real U.S. GDP, in the solid red line, peaked in the fourth quarter of 2019 at $19.3 trillion. At the bottom of the Covid crisis shutdown, which is the quarter that just ended June 30, 2020, the economy shrunk $17.2 trillion. The dotted line is what would happen on the next 18 months if the forecast of economists is correct.
To be clear, the consensus forecast of the experts polled by The Wall Street Journal every month is that GDP will hit $19.2 trillion at the end of the first quarter of 2022, which would mark almost a full recovery back to the all-time peak size of the U.S. economy of $19.3.
The gray line shows the size of the economy if the Covid crisis never happened. If The Great Expansion of April 2009 to March 2020 had continued along its long-term growth rate, the economy would have been about a trillion dollars larger in early 2022.
Despite what might have been, the V-shaped recovery remains the expected outcome.
The Standard & Poor's 500 stock index closed Friday at 3,271.12, up seven-tenths of 1% for the day, +1.71% from a week ago, and +37.53% than its March 23rd bear market low.
Stock prices have swung wildly since the crisis started in March and volatility is to be expected in the months ahead.
Assets invested for life need not be influenced by the near-term risk of the virus crisis.
The Conference Board Leading Economic Index (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers' new orders – consumer goods and materials; 4) ISM index of new orders; 5) manufacturers' new orders, nondefense capital goods; 6) building permits – new private housing units; 7) stock prices, S&P 500; 8) Leading Credit Index™; 9) interest rate spread; 10-year Treasury less fed funds; 10) index of consumer expectations.
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