“The rally in stocks in the face of an appalling US GDP print again emphasises the importance of future expectations vs. past facts.” – Jan Loeys, Chief Market Strategist at JP Morgan
On Wednesday, we learned that the U.S. economy contracted at a 2.9% rate in Q1, which was much worse than the -1.8% expected by economists.
Compared to the initial estimate of +0.1% and the Q4 rate of +2.6%, this looks like a total disaster.
Yet not only did stocks not collapse, they actually rallied on the day of the report.
“If investors had been told in January that US Q1 growth would disappoint by 5%, they would probably have sold stocks heavily,” said JP Morgan’s Jan Loeys on Friday.
But it’s not January anymore.
While the bad news about Q1 has been confirmed, we have all kinds of other information about the present, which makes us a little more confident about a brighter future. And don’t forget: Q1 ended back in March.
“The rally in stocks in the face of an appalling US GDP print again emphasises the importance of future expectations vs. past facts,” said Loeys.
Here’s more from Loeys:
…Why are they then not selling now on the successive official downgrading of Q1 growth over the past two months? The reason is likely that there is no clear smoking gun for Q1 weakness (in this case uncertainty helps), and Q2 data so far suggest Q1 was a one-off with little implication for the coming quarters aside from underlining how weak growth is in this cycle…
…On the economy, there is strong agreement that growth is picking up from this year’s appallingly weak start to just over 3% over the next six quarters and that global inflation is set to rise about 0.3% over 2013-15. Most investors we see think risk on growth is biased to the upside. There is little interest in discussing or protecting against secular stagnation or stagflation…
On Wednesday, Renaissance Macro’s Neil Dutta sent out a brief note titled “GDP=USELESS.” In it, he homed in on the more up-to-date indicators. Here’s an excerpt.
If GDP were truly so weak, we would not expect aggregate hours worked to climb 3.7% annualized through May, jobless claims to remain near cycle lows, consumer confidence to hit a cycle high, industrial production to climb 5.0% at an annual rate over the first five months of the year, core capital goods orders to be up 5.8%, ISM to be above 55, and vehicle sales to hit their strongest annualized selling pace for the year. GDP is the outlier in these data points. I will roll my eyes and move on. Most of the data we just mentioned is consistent with underlying growth over 3.0%.
It can’t be emphasised enough that stocks and the economy are not the same thing. Importantly, stock values are largely based on future expectations, not the past. So, if there’s any relationship that exists, it’s between stocks and expectations for the future of the economy.
This coming week, we’ll get new June data on the state of global manufacturing and the U.S. labour market. Surely, this stuff will be much more likely to move markets than three-month old GDP data.
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