Rough Week
Well, there is one thing not open to debate in Washington – the fact that the battle over the debt ceiling led to the worst week this year for the equity markets. The S&P 500 lost a whopping -4.24%! Ouch!
Lost in a lot of the unbelievably riveting (yawn) live news coverage of every moment of the legislative action was the fact that the second quarter real Gross Domestic Product (GDP) numbers were worse than Adam Dunn’s 2011 batting average (.165 Avg., with about 130strikeouts in around 300 at bats – hey I’m a Nationals fan with a grudge). Real GDP printed at a disappointing 1.3% annualized pace for the 2nd quarter (vs. predicted 1.8%) and the firstquarter number was revised down to show just a 0.4% gain. Ugh.
In fact, the revised GDP numbers, which revise data back for 3 years, show even more information about the recent recession.
All of the equity markets we track were losers last week. The Dow Jones Industrial Average (DJIA) lost -4.24% to finish at 12,143, the S&P 500 Index lost -3.92% to finish at 1,292 and the Nasdaq Composite Index lost -3.58% to finish at 2,756. The Russell 2000 Index, which tracks the performance of small capitalization stocks, lost a whopping -5.32% to finish at 797.
I simply cannot bring myself to spend another single second writing about the debt deal in Washington – I think everyone is sick of it.
The news about GDP, while not good, is at least not completely overdone. The first quarter gain in GDP was initially estimated at 1.9%. Revisions to GDP occur every year at this time and they extend back three years. The revisions published last week show that the most recent recession (AKA “The Great Recession”) was actually worse than previously thought. Originally, real GDP for 2008 was thought to have been little changed versus 2007. Upon revision, GDP contracted by 0.3%. 2009 now looks far worse. The drop in GDP is now recorded at -3.5%, versus the previously estimated -2.6% drop. In the fourth quarter of 2008, (when the collapse of Lehman Brothers happened), real GDP contracted at an unbelievable -8.9% annual pace – making it the most severe one-quarter drop in GDP in 40 years.
So there you have it – in case you were fed up with the debt ceiling news…But here’s how I’m looking at it. 2007, 2008, and 2009 are all behind us. The recent poor GDP report is showing the effects of Japan and a spike in fuel prices.
We think third quarter 2011 GDP will come in much higher that the second quarter, and that’s what’s important going forward. The GDP remains below the 2007 high water mark, meaning we are still in a recovery and have yet to enter an expansion. And when you look at the recent earnings reports of companies that make (I’m not allowed to mention individual company names so…) hamburgers, popular cars, bulldozers, coffee, process credit card transactions and run a huge railroad – they all look very strong.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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