I’m sure you saw the headlines:
“Record Economic Plunge”1
“Second-Quarter GDP Plunged by Worst-Ever 32.9%”2
“U.S. Economy Contracted at Record Rate Last Quarter”3
It sure sounds like the sky is falling.
Is it really? Let’s take a step back and put the news in perspective.
The coronavirus shutdown thumped the economy, businesses, and workers badly over the last two quarters, and it’s uncertain how quickly we’ll recover.
We knew that Q2 GDP numbers (Gross Domestic Product) were going to be horrible. In fact, in May, the Federal Reserve thought they were going to be even worse.4
So, ~33% down is actually better than expected.
But, despite the headline, we didn’t actually “lose” 33% of economic production last quarter. The Commerce Department reports data on an “annualized” basis to make it easier to compare; so, if you looked at it quarter-over-quarter, the economy lost 9.5% since Q1.5
That’s still an eye-watering blow to the economy, but it’s not an apocalypse.
The largest contributing factor to the economic losses was a steep drop in personal spending, particularly on services, which makes complete sense in a shutdown.6
Three points before we move on:
- This is an advance estimate for Q2, and we will see revisions as more data are finalized.
- Though this is the sharpest drop in the shortest time in history, it was caused by the shutdown, and we’re already climbing out of it.
- 63.8% of economists think Q3 is when we’ll see the recovery really pick up steam, and the current forecast is for 15.2% annualized growth this quarter.7
So, what’s up with markets?
I think markets are being driven by a few big trends.
In a previous note, I mentioned what a Nobel-laureate economist calls “FOMO mania” by investors who fear missing out on the bounce. I think that’s still in effect as investors continue to pile into stocks, especially in the tech sector.8
I also think the market is being supported by massive government spending and Federal Reserve intervention.
And thirdly, I think a lot of traders are betting heavily on the recovery. If states have to shut down again, the collective delusion may collapse and trigger a correction. We’re watching for that.
How long will the rally last? That’s anyone’s guess. I’ve seen many cheerful forecasts predicting new all-time-highs. I’ve also seen plenty dolefully predicting the next crash.
With so much unknown, they’re all guesses. Even in less-murky circumstances, the market gurus are only accurate about 47% of the time.9
So, since we can’t predict what’s going to happen in Q3 and Q4, we’re staying agile and focusing on the fundamentals of good planning.
I know, it’s a really boring answer. But that’s how we give ourselves the best opportunity for success in chaotic times.
Let’s talk about you.
How are you doing?
What kind of decisions are you making right now?
Can I help? Shoot me an email at firstname.lastname@example.org and let me know.
|Chris Mullis, Ph.D., CDFA®