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GDP Growth: Things Have Changed Little | Pinehurst Financial Advisor

The second-quarter gross domestic product data released Friday showed a robust 4.1 percent increase. It wasn’t “historic,” as President Donald Trump proclaimed, but it was undoubtedly solid. With midterm elections a little more than three months away, it is no surprise the release became fodder in our endless national political debate. Lots of misinformation and questionable claims were proffered.

But let’s set aside partisan political gaming of the report and try to focus on what the number means for investors. Perhaps we may even uncover clues to watch for in future data releases.

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Three key issues seem to be getting overlooked by most commentators:

No. 1. This remains a recovery from the 2008 credit crisis: This is the dominant factor that drives all others. It is also one that economists, pundits, and investors seem to forget. Any investor who has used this context as their economic framework since the crisis ended, has been well served by it.

The rest forget too soon: It was less than a decade ago that the entire global financial system was on the verge of seizing up. In the U.S., GDP plummeted, unemployment rose to 10 percent, stock markets plunged 57 percent, housing lost more than a third of its value, retail sales collapsed and wages froze. Huge government bailouts for bank and automakers, and zero interest rates soon followed.

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The long and dissatisfying recovery is the result of the gradual repair of that horrific crisis. As Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University presciently warned in a 2007 white paper, five historical economic crises should be the frame of reference for economists when referring to the Great Recession — not the usual cycle of recession and recovery.

Thus, the hallmark of this recovery cycle has been dominated by halting and erratic GDP, mediocre wage gains, soft retail sales and other indicators of a healing credit cycle. As we have discussed repeatedly, this is normal for recoveries from financial crises, and this phenomenon is very different from ordinary recoveries from the typical recession.

No. 2. Stocks do not need faster GDP growth: I see the markets rather differently from some of my fellow commentators.

Consider first and foremost that 2017 was marked by torrid gains in equity markets, which rose more than 20 percent. When gains come that fast, markets occasionally need to digest them. A year of small gains afterward is merely mean reversion in action.

Second, the cornerstone Trump campaign promise of cutting taxes came about in late 2017. Equity markets long ago incorporated a GDP bump from lower corporate taxes. Said differently, gains from the tax cut are already reflected in prices. There is no reason to expect the cuts to provide a second bump.

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Thanks to Financial Advisor Online Magazine for this great article

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