Stocks Rise As Q4 GDP Growth Estimates Decline

We know that stocks are rallying because of hopes for a cyclical recovery in 2020. However, it is still amazing to watch stocks continue to rally, even as they are overbought, while some Q4 GDP growth estimates fall below 1%. The S&P 500 is up 24.48% year to date as of Friday in part due to trade deal hopes and an expected cyclical recovery. The S&P 500 has experienced 28 trading days without back to back losses. That’s the longest streak in almost eight years. The VIX has been below 15 for 25 days. The 2019 high streak is 26 days. There was a 66-day streak prior to the 20% correction in Q4 2018.

On the other hand, Oxford Economics sees 1.3% Q4 GDP growth. It lowered its estimate for consumer spending growth from 2.9% to 1.4% because of the October retail sales report we will discuss in this post. Even though the October retail sales report was weak, there’s a reason to think the consumer is primed to have a solid holiday shopping season as its savings rate is above last year’s rate, it isn’t leveraged, and there is near full employment with low inflation. Conversely, the Bloomberg Consumer Comfort index has crashed in the past 3 weeks. The October retail sales report caused JP Morgan to lower its Q4 GDP growth estimate from 1.75% to 1.25%.

The table above shows the usually very bullish St. Louis Fed only sees 1.5% growth. The NY Fed’s estimate was brought down by the industrial production report which we will also discuss in this post (these estimates could be too bearish because it was hurt by the GM strike). The retail sales report didn’t hurt it probably because it’s estimate for consumer spending growth was already low. It’s GDP estimate fell from 0.73% to 0.39%. Keep in mind, this is the prediction that perfectly forecasted Q3 growth. Finally, the Atlanta Fed Nowcast fell from 1% to 0.3% as the estimates for real personal consumption expenditures and real gross private domestic investment growth fell to 1.7% and -4.4%. Those are terrible, borderline recessionary numbers.  

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