Howdy folks!
My apologies for skipping last week. Not that you were sitting on pins and needles, waiting to read boring finance stuff. Ha! Just kidding. Hopefully I make it somewhat better than boring.
This week, you may have seen the big news that the US economy has officially fallen into a recession in 2022 (despite what the White House is saying). The technical definition of a recession is two consecutive quarters of GDP (gross domestic product – the primary measure of economic activity) contraction. GDP declined by 1.6% at an annualized pace in the first quarter. Then, as was released on Wednesday, it declined by 0.9% in the second quarter.
What to make of all this? And should we be worried?
Well, there are certainly many perspectives. But, from a stock market perspective, I am actually quite hopeful going forward.
This may sound counterintuitive. But the stock market tends to be a leading economic indicator. This means that the market goes up when it anticipates improving conditions and goes down if it anticipates declining conditions.
When viewed in this context, my optimism is not counterintuitive. It’s common sense.
In fact, the last two bull markets began on days when things were really bad. In March of 2009, when it looked like the entire global financial system might break. And again in March of 2020, when the entire global economy was shut down.
Things were bad and the market anticipated things would improve. So the stock market reversed trend and began its new ascent.
In addition to this, the direction of the GDP number is important. The second quarter number was an improvement over the first quarter number (-0.9% versus -1.6%), despite being another contraction.
Often with the stock market, whether we look at GDP growth from a broad perspective or earnings growth from an individual stock perspective, it’s not the actual number that matters most. It’s the direction that number is moving in.
There’s no telling what Q3 will bring and it’s important to remember that no one leading indicator can predict what will happen. But staying invested over the long term is always a good idea. And it feels especially good to me at the moment.