Market is a forward looking mechanism

When you see a GDP growth below one percent and at the same time market rallying to new high, probably the market has already discounted the poor GDP and is anticipating GDP growth rate recovery.

PONDER this apparent mystery. In the three months to the end of September, the American economy grows at its slowest rate in almost four years as the long-feared housing market slump shows up for the first time in blunt statistical reality.

But in precisely the same three-month period, the stock market bulls ahead. The Dow Jones industrial average breaks through its record level (set back in early 2000, when the economy was coming off its fastest rate of growth in almost 20 years) and then ploughs on through the 12,000 barrier with apparently no sign of slowing.

Is the market behaving irrationally? Are investors failing to properly discount the real risk of an outright US recession? Or is the market acting as it is supposed to, as a forward-looking, rather than coincident, indicator? Will the third quarter of this year turn out to be the nadir of the slowdown, with corporate profits in the coming six months fully validating investors’ optimism in the durability of the US expansion?

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5 comments:

walter said...: time will tell...

but i do have to mention the following considering your following statement:

"When you see a GDP growth below one percent and at the same time market rallying to new high, probably the market has already discounted the poor GDP and is anticipating GDP growth rate recovery."

1. we havent seen GDP below 1% - an article came out on friday about the statistical mistake that "implies" a GDP below 1% - we'll see GDP below 1% when there is an official correction - whenever that comes

2. the DOW rallied to a new high on thursday, the day before GDP was released at 1.6% - now we may never close above 12167.02 again or we may - who knows...

3. do you really think that the market has already priced in a GDP below 1% - it may have but I doubt it... my opinion, which may be wrong, is that the market is rallying on

a) pschological/mental break of DOW 12,000

b) a focus on news of housing and economic "soft landing"

c) a perception that fed rate hikes are done

d) a perception that earnings would be and have been decent

with cheerleader CNBC and the mainstream media spinning all news as good news, there have got to be lots of retailers getting in here...

also DOW was down friday on good vol, and yesterdays vol sucked...

we'll see...; Oct 31, 2006, 8:21:00 AM
Pradeep Bonde said...: We will see. The earnings are good, it has nothing to do with cheerleading, look at actual numbers.

Many times GDP slows down a quarter to roar back again. If GDP is down why the earnings are not down dramaticaly?; Oct 31, 2006, 8:41:00 AM
walter said...: If GDP is down why the earnings are not down dramaticaly?

good question, and i dont know enough to give a good answer, but i would put forth the following:

1. lag time...
2. earnings are stitistics, all statistics may be manipulated, including GDP and individual company earnings...
3. we know that the "state of the economy" and the equity markets are not always correlated

otherwise i dont know...

i am sure lots of retailers are pouring money in their IRAs and ETFs and mutual funds now that we are at ALL TIME HIGHS!

i guess my main point is that its easy for the markets to act irrationally and to discount bad news, but sooner or later is always catches up... and as for earnings, i have read the zachs stuff - there is just as much positive spin there as negative spin from others - yes growth may be double digit, but they are beating lowered estimates - so there is good and bad news in there - which is more important? i dont know...

and the debate goes on...

anyone can find stocks that will go up and go down under any market conditions...; Oct 31, 2006, 8:57:00 AM
walter said...: Dean Baker's post today is interesting considering our current discussion:

October 31, 2006
Do All Economists Expect a Stronger Fourth Quarter?

Not one of the "Blue Chip" 50 economic forecasters saw the coming of the 2001 recession in the fall of 2000. How could 50 intelligent informed observers make independent assessments of the economy and fail to see a major event that was right in front of their eyes. The obvious answer is that forecasters do not make independent assessments. They try to make sure that their foecasts are consistent with the rest of the forecasts. This way, if they are right, they can be happy. And, if they are wrong, well, who could have known?

This history is important to keep in mind as we approach a period of extrordinary economic uncertainty. It is also a good reason that reporters should not be asserting that, "with Americans earning more and spending more, economists expect that the gross domestic product will expand faster than it did in the third quarter." Reporters who gave their readers the wisdom from the Blue Chip 50 in the fall of 2000 would have badly misled them about the state of the economy at the time. There are in fact many pessimists about the current state of the economy (not just me), reporters should present their assessments also.

-- Dean Baker

http://www.prospect.org/deanbaker/; Oct 31, 2006, 9:11:00 AM
walter said...: i just read the timeonline article that you link to... like these parts:

In any case, what the consumer has lost from the fall in the price of his house, he has probably gained from a fortunate confluence of economic events. Oil prices have fallen by more than 20 per cent in the past two months, restoring some spending power.

(i think walmart would disagree with this, considering their news yesterday...)

Wage growth seems to be accelerating, after a long period of decline relative to profits. And the stock market’s buoyancy is putting some money back into the blighted savings of American workers.

(uh oh - inflation and maybe they arent done raising rates)

Perhaps, most important of all, market interest rates have edged lower for the past three months. The ten-year Treasury yield, which sets mortgage rates, is around 4.75 per cent, down half a percentage point since early July.

(inverted yeild curve?); Oct 31, 2006, 9:29:00 AM

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