HomeMarket NewsThe Real Deal: Understanding the Fallacy of GDP Obsession

The Real Deal: Understanding the Fallacy of GDP Obsession

Actionable Trade Ideas

always free

GDP - Unpopular Opinion: GDP Doesn’t Matter

Source: shutterstock.com/WESTOCK PRODUCTIONS

Why is there such an obsession with gross domestic product? In the realm of future stock market performance, isn’t it usually the stock market that influences GDP, rather than the other way around?

This morning’s news brought word of a revision in U.S. fourth-quarter GDP, bumping it up to 3.4%. But should we really care? The term “revised” alone should give us pause. Do we dare glance to the left of the equals sign to discern the drivers behind the GDP figures?

What exactly is GDP anyway? It serves as a gauge of a country’s economic activity and stands as a central economic health indicator. This metric encapsulates the total monetary value of all goods and services produced within a nation’s borders over a specific period. Calculated quarterly or annually, GDP consolidates output across various economic sectors including personal consumption, business investment, government spending, and net exports (exports minus imports).

And the revisions keep rolling in.

So, GDP essentially functions as a report card on past events that isn’t entirely accurate upon initial release. It falls short of reflecting the holistic standard of living or well-being within a nation. When GDP hinges on factors like the wealth effect stemming from a surge in a market-cap weighted index like the S&P 500, while small-cap companies lag behind, is it truly indicative of economic robustness? Or is it merely highlighting a lopsided and skewed economic landscape?

Why the Obsession with GDP Is Misguided

The truth of the matter is this: the relationship between GDP growth and stock prices, though positive over the long haul, isn’t as straightforward as it may seem.

The stock market itself can actually shape GDP through its role as an indicator of sentiment. In a bull market, heightened wealth and confidence can trigger increased consumer spending and investment, thereby elevating GDP. Conversely, a bear market can stifle spending and investment, exerting a negative impact on GDP.

The essence of the stock market lies in its forward-looking nature, often responding to anticipated future economic conditions rather than existing ones. This forward-looking trait allows the stock market to rally during economic downturns or lag during periods of prosperity, as investors factor in forthcoming risks and opportunities.

But there’s nuance to this too. One of the rationales behind the upsurge in fourth-quarter GDP pertains to escalated consumer spending compared to initial estimates. superficially examining the S&P 500 would suggest that consumer spending should be exceptionally robust. The GDP figures are essentially mirroring what the “stock market” has been articulating throughout 2023.

Nevertheless, as I’ve consistently highlighted, small-cap and retail stocks haven’t fared well. If a portion of the GDP upturn is attributed to the “stock market” playing a role in bolstering consumer confidence, why then hasn’t the SPDR S&P Retail ETF (NYSEARCA:XRT) reclaimed the heights seen in 2021?

I recently delved into retail stocks in InvestorPlace, perceiving them as a bullish sector of the market. Momentum is gradually gaining traction. The GDP modifications for the fourth quarter reflected a year of stagnation in the realm of retail stocks for the most part in 2023. This trend might persist, but the crux here is that relying on GDP as a signal for impending stock upticks warrants caution.

In Conclusion

If sections of the economy propelling GDP forward aren’t reciprocated by the stock market, then we ought to view these revisions skeptically. It’s wiser to analyze the market itself as an oracle. On that note, perhaps retailers are beginning to detect a surge in consumer spending, and maybe even inflation. In that scenario, GDP fades into insignificance, making room for the inflationary implications of heightened spending and the subsequent actions of the Federal Reserve.

Michael Gayed, as of the publication date, did not hold any positions (directly or indirectly) in the securities referenced in this article. The opinions articulated here are solely those of the author and are subject to the guidelines set forth by InvestorPlace.com.

Swing Trading Ideas and Market Commentary

Need some new swing ideas? Get free weekly swing ideas and market commentary from Jonathan Bernstein here: Swing Trading.

Explore More

Weekly In-Depth Market Analysis and Actionable Trade Ideas

Get institutional-level analysis and trade ideas to take your trading to the next level, sign up for free and become apart of the community.