Gold News

U.S. GDP Falls: Signal Or Noise?

Oh stop worrying. Recession 'mild'...

IF WE GET a recession in 2022 or 2023, The Wall Street Journal informs us, "it'll be a mild one," reports Brian Maher at The Daily Reckoning.

Just so. And if RMS Titanic strikes a North Atlantic berg en route to New will only be a tiny one.

The United States Department of Commerce reports that first-quarter gross domestic product contracted 1.4%.

The shrinking was "unexpected" – at least by the experts among us. A Dow Jones survey of economists had divined a 1% quarterly gain.

What evils account for the 1.4% receding? Reports CNBC:

"Rising Covid Omicron infections to start the year hampered activity across the board, while inflation surging at a level not seen since the early 1980s and the Russian invasion of Ukraine also contributed to the economic stasis."

Were Dow Jones' surveyed economists unaware of rising Omicron infections? Of inflation at a level not seen since the early 1980s? Of the Russian invasion of Ukraine?

We are reminded of an inept physician who perpetually misreads the vital signs. Some might label him a "quack". In the interest of decorum, we will not.

Yet he somehow retains his prestige, despite his multiple botchings.

These same experts insist that first-quarter returns are something of an aberration – that the contractionary forces will soon clear out.

"This is noise; not signal," insists  Ian Shepherdson – chief economist with Pantheon Macroeconomics – "the economy is not falling into recession."

Yet Simona Mocuta, chief economist with State Street Global Advisors, gives the alternate prognosis:

"In retrospect, this could be seen as a pivotal report. It reminds us of the reality that...things are changing and they won't be that great going forward."

Deutsche Bank – incidentally – forecasts a "significant recession" late next year.

Its crackerjacks hazard the Federal Reserve will raise interest rates frantically to cage the inflationary menace presently running at large.

We incline toward the Deutsche Bank position.

We note that the 10-year Treasury yield has risen to scale the highest level since 2018.

Rising "growth stocks" such as Amazon, Apple, Facebook and Netflix have elevated the overall stock market.

Yet growth stocks are exquisitely sensitive to rising interest rates. And the same growth stocks that can push...can also pull.

Explains Peter Tchir of Academy Securities:

"Companies relying on future cash flow growth experience much greater risk as rates rise, and that has been the part of the market that has really driven returns in the stock market. That is why some parts of the market, like the Nasdaq-100, which is heavy in technology stocks, is getting hit much more than the Dow Jones Industrial Average, which has [fewer] companies expecting outsized growth."

Perhaps we should not be surprised then that the stock market has endured another hemorrhaging after the GDP data.

And so we wonder: Will interest rates march higher and higher?

Michael Hartnett is Bank of America's chief investment strategist. The cycle is reversing, he claims. Both inflation and interest rates are heading the other way.

Writes Business Insider:

"The lower inflation of the last 40 years that sent interest rates down and stock market valuations higher has reached a turning point. 'We believe we are at a secular turning point for both inflation & interest rates,' Hartnett and a team of BofA strategists said in a note."

But why? Hartnett and his team continue:

"We believe 2020 likely marked a secular low point for inflation and interest rates due to a reversal of deflationary secular factors, fiscal excess and an explosive cyclical reopening of the global economy creating excess demand for goods, services and labor."

What does the foregoing suggest for the stock market?

Markets have witnessed eight major cycles dating to 1871. Investors hauled in the greatest gains – nearly all of them – in four cycles of the eight.

Investors handed over their gains in the remaining four cycles. The silent thief of inflation robbed them.

Importantly: The bulking majority of market gains across these cycles were harvested during disinflationary cycles – not inflationary cycles.

What if  Hartnett is correct? What if the 40-year cycle of declining inflation and declining interest rates is ending?

What if both are streaking higher?

It would suggest hard sledding for stocks during the coming the cycle swings from inflation.

At present valuations, stocks could potentially plummet some 50% or more.

And by some estimates, your odds of losing money in the stock market approach 100% – odds that would make the bravest fellow quail.

So much for the following decade. What if we train our binoculars on the farthest horizon...20 years out?

Michael Carr instructs technical analysis at New York Institute of Finance. Says he: "Starting from this level, stocks are likely to disappoint over the next 20 years."

Twenty years? That is correct:

"When the P/E ratio is near all-time highs, as it is now, the S&P 500 delivers annual returns averaging about 5% over the next 20 years. When the P/E ratio is near all-time lows, returns are about three times higher, averaging 15.4% a year over the next 20 years."

Yet as we are fond to say: Climate is what you can expect. Weather is what you actually get.

Even the harshest bear market has its joys, as even the harshest winter has its thaws.

And the Horae – the Greek goddesses of the seasons – are fickle and capricious beings. Their plans are not known to us.

Yet we hazard the overall forecast is poor. Are you outfitted for heavy weather?

Formerly an independent researcher and writer, Brian Maher is managing editor of The Daily Reckoning, the contrarian investment email launched in 1999 and now read by over half-a-million people worldwide each day.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals