Chart Advisor: Evaluating the GDP Report

By C. Theodore Hicks II, CFP, CKA, CMT

1/ GDP

2/ Reaction

3/ Fed Funds

4/ Ten Year Treasury

5/ Secular Bear

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1/

GDP

Courtesy of Optuma

Yesterday, the US Bureau of Economic Analysis released their “advance estimate” for GDP for the first quarter of 2024. Economists were expecting to see 2.4% but the advance estimate came in at 1.6%.

As expected, the crackpot news media did their thing writing stories about this dismal GDP report. One major news outlet stated that this GDP report “marks a sharp slowdown from the 3.4% pace seen during the fourth quarter. It is the slowest growth in two years.”

Correct. That’s what the Fed is trying to accomplish, you geniuses! 

Chairman Powell and the Federal Reserve are trying to get inflation under control by slowing the economy down but without causing a recession. One could easily argue that Chairman Powell is doing a good job with this objective … so far.

(Full disclosure, yes, I agree, Chairman Powell and his compatriots took too long to start raising rates. No, I do not think they’ve gotten every decision right. But, Lord knows, neither have I. Nor have you.)

2/

Reaction

Courtesy of Optuma

For Chart 2, I’m showing both the 5-minute (left) and the daily (right) candle chart for SPY, the SPDR S&P 500 ETF. The gray box on the left is highlighting the day’s trading with everything before and after representing pre and post-market hours. 

Initially, the US equities markets sold off on the GDP news, but immediately began to rally. This is a great example of why I prefer to look at the charts myself as opposed to just reading the news. The journalists are going to report that the S&P 500 lost about .40% on the day. However, when you look at the close as compared to the open, the close was ~0.8% higher. If you examine the close as compared to the low of the day, the close was 1.2% higher. While it is accurate to say that the S&P 500 lost .40% on the day, I would argue that it is journalistic malpractice to spin that as a bad day. The rally off the initial reaction was pretty strong.

3/

Fed Funds

Courtesy of Optuma

We started the year off with many expecting the Federal Reserve to cut rates multiple times. Some were even expecting fairly aggressive rate cuts. 

As the first quarter began drawing to a close, the narrative began to change. In order to squash inflation, one could argue that the Federal Reserve may actually need to raise rates. If the GDP report came in at 2.4% as expected or the 3.4% pace that we saw in the fourth quarter, Chairman Powell would have a lot of justification in raising rates. The fact that GDP came in positive but slower than expected could easily be viewed as good news. So far, they are slowing the economy and – so far – we have avoided a recession.

4/

Ten Year Treasury

Courtesy of Optuma

In examining history, we can see that the 10-year Treasury yield – the blue line in Chart 4 – is pretty heavily correlated to the Fed Funds rate (green line). Based on this correlation, one could make an argument that we do not need the Federal Reserve setting interest rates; we could just let the free market decide and use the 10-year Treasury yield instead. 

With this historic context in mind, the 10-year Treasury yield does suggest that it might be appropriate for the Fed Funds rate to be cut; perhaps just not as aggressively as some were hoping.

5/

Secular Bear

Courtesy of Optuma

This brings us to Chart 5 which is showing the S&P 500 from 1965 through 1979. This time period was a particularly nasty secular bear market. Yes, the US stock market had cyclical bull phases within this secular bear. But there is no doubt that this time period was an incredibly tough time period for investors. 

One of the key contributing factors to this time period was the record high inflation – the record persistently high inflation. As a money manager for individuals and families, I have to have an investment management strategy that can help us navigate through something similar to what is seen on Chart 5. Naturally, if we are not in a secular bear market, our investment strategy has to navigate that environment too. So while I would love to see our economy growing faster, I definitely want to see inflation under control. As a result, I consider yesterday’s GDP report to be good news.

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Originally posted 26th April, 2024