Q4 GDP Report Implications For Stock Market

This article will mostly consist of economic analysis, but we would be remiss to ignore the latest stock market rally for 2 reasons. First, economic analysis is partially done to forecast equity returns. Second, stock returns affect consumer and small business confidence, meaning they affect the economy through reflexivity. The stock market is very overbought as of early March as the S&P 500 is up 11.84% year to date, the CNN Fear and Greed index is at 70 out of 100 which signals ‘greed’, and the Nasdaq is on a 10-week winning streak.

As you can see from the chart below, the AAII investor survey shows the percentage of bears has fallen to just 20% which is the lowest since January 2018 when investors had record high euphoria.

The good news for the market is the percentage of bulls is at 41.6% which is about 20% lower than that euphoric peak. To be clear, euphoria is bad for returns as everyone being ‘all in’ means there are few investors left to turn bullish to push valuations higher. Bull markets are built on skepticism and die from euphoria.

Long Awaited Q4 GDP Report Is Here

The Q4 GDP report was delayed by the government shutdown. The slight controversy when analyzing this report is the battle between those who follow quarter over quarter annualized growth and those who follow year over year growth. Both rates are important. Quarter over quarter growth is the most highly cited, which means we will show annual growth in the chart below to present a fuller picture.

There was controversy this quarter because the picture is sharply divergent depending on how you review it. Quarter over quarter growth was 2.6% which beat estimates for 2.2%. However, it was the 2nd straight quarter with lower growth than the previous one. The chart above shows annual growth was 3.08% which was the strongest growth since 2015. For all of 2018, growth was 2.9%. This differentiation may be old news anyway because Q1 growth is expected to be poor. The Atlanta Fed Nowcast’s first estimate is for only 0.3% quarter over quarter growth and the NY Fed is at 0.88%.

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