From Green Shoots to Drought? Making Economic Sense of Investing
It’s not easy to stick your neck out and call a top when the stock market has some good momentum going for it. But calling the exact top isn’t what’s important. Keeping and growing your wealth is. To do this, you must make sense of the economic data that are causing the green shoots and decipher for yourself whether they will blossom from here or wither and die from a potential drought.
Our government and the Fed know that if the U.S. stock market is going higher, then in the minds of the individual, “all is well.” Obama even said a couple days ago that “GDP Shows Economy Headed in Right Direction.”
So what did this GDP report show?
CONTRIBUTIONS TO GDP
|
Consumption |
-0.90% |
|
Investment |
-2.60% |
|
Inventories |
-0.83% |
|
Net Exports |
1.38% |
|
Government |
1.12% |
Source: CNBC
Josh Bivens of the Economic Policy Institute said that “The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter.”
ARRA is the 407 page American Recovery and Reinvestment Act of 2009.
Take out the government addition to GDP and you’ll see that GDP actually contracted by 2.95% last quarter. Adding debt to debt might help improve the short term, but it isn’t going to make things better for our economy long term.
Many of the jobs created for these short term projects will be gone once the project is finished. These government programs are not long term solutions for the unemployment problem in the U.S.
The GDP data shows that consumer spending is negative, along with business spending on capital. It’s kind of hard for companies to grow in this fashion. In other words, the current green shoots will eventually dry up from the coming drought.
GDP Is Only Part of the Picture
According to Ed Easterling, author of the book, Unexpected Returns, “When the sales of all companies are consolidated together, the result is essentially Gross Domestic Product (GDP). Therefore the aggregate profits of all companies can be compared to GDP as a measure of profit margins and relative profitability. (But) economic growth is not the primary driver of stock market returns; stock market returns are driven primarily by a cycle in the P/E ratio. Although economic growth does increase the denominator in the P/E (earnings), actual returns are generally the result of trends in the P/E ratio.”
We’ll take a closer look at this relationship in the near future.
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