FINANCIAL MARKET UPDATE 9.29.2020

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

ECONOMISTS EXPECT A JUMP IN Q3 GDP

After experiencing the largest decline of activity since the Great Depression, the economy appears to have recovered some lost ground. Leading into the last days of the third quarter, economists have been projecting a robust rebound in economic growth. While this is certainly a positive development, the pace of the recovery is expected to slow after the initial bounce.

Gross Domestic Product (GDP), the predominate measure of economic growth, declined by an annualized -31.7% during the second quarter. That marks the largest single-quarter decline of GDP since records began in the 1940s and is estimated to be the largest decline since the Great Depression. The Atlanta Fed publishes a widely followed running forecast of the current quarter’s GDP called GDPNow. The model is a purely quantitative estimate, which is updated as new economic data is published. The model estimate has been trending higher throughout the quarter and is currently projecting a staggeringly high 32% annualized increase in GDP for Q3 (see below). 

 

There are a couple of things to keep in mind when interpreting the GDP data. First, GDP is often quoted in annualized terms, which can exaggerate the results. The economy did not actually contract by -31.7% during the second quarter; it contracted by -9.1%. The process of annualizing a quarterly figure assumes the subsequent three quarters will be identical. This is clearly not the case now, as the economy has experienced a material recovery instead of another -9.1% decline. Similarly, if the GDPNow model proves correct, the economy won’t actually expand by 32% unless the pace of recovery continues for the next three quarters as well (more on this later). Second, if GDP in Q2 was -31.7%, and GDP in Q3 ends up at 32.0%, it does not mean the economy has fully recovered. To illustrate this, imagine you owned a business that sold computers. If sales declined from 100 computers last year to 80 this year, it would be a 20% decline. If sales subsequently recovered by 20% the following year, you would have only sold 96 computers. It requires a larger percentage increase when growing from a smaller base. In the case of GDP, it would take a 46.5% annualized gain to breakeven after declining by -31.7%.  

Moving forward, growth is expected to moderate. The jump in GDP we are experiencing now is the result of a large swath of the economy coming back online after being shut down. With a portion of the service sector still closed or operating at a diminished capacity, we should not expect to sustain the level of growth achieved pre-COVID, let alone the rapid pace of the third quarter. The key to getting back on track will be fully reopening the economy and reducing the elevated level of unemployment. Doing this may require a vaccine or dramatic improvements in treating the virus. The economy has come a long way from the depths of the recession, but there is still much further to go.    

 

WEEK IN REVIEW

  • Last week the S&P 500 closed negative for the fourth consecutive week. Between 9/3 and 9/23, the index fell 9.6% and narrowly avoided falling into correction territory with the NASDAQ (so far). Coming into September, valuations and sentiment appeared to be pushing to uncomfortably high levels. Corrections are normal and healthy and help clear away market excesses.
  • Data published last week showed orders for durable goods (those intended to last at least three years) increased 0.4% in August but missed expectations of a 1.9% increase. New orders for nondefense capital goods excluding aircraft, a proxy for business investment that is used to calculate GDP, increased at 1.8%, beating expectations. Weakness in motor-vehicle, commercial-aircraft and defense orders weighed on the headline number.
  • This week will be a big one for economic data releases. On Wednesday, there will be a revision to Q2 GDP. On Thursday, we will get an update on initial jobless claims, inflation, and the ISM manufacturing PMI. Headlining the weak will be the jobs report published on Friday morning.

HOT READS

Markets

  • The September Market Swoon Accomplished Most of What Corrections Are Supposed to Do (CNBC)
  • Inflation is Already Here – For the Stuff You Actually Want to Buy (WSJ)
  • SPACs are Still Bulls*** (Josh Brown)

Investing

  • Anchoring & Adjustment in the Stock Market (Ben Carlson)
  • Nikola’s Business Model Relies on Big Leaps in Technology, Large Declines in Costs (WSJ)

Other

  • Welcome to FinTok, Where Day Trading, Options Investing, and Misinformation Reign (Institutional Investor)
  • A Few Rules (Morgan Housel)
  • Intermittent fasting doesn’t help you lose weight, UCSF study suggests (CNBC)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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