2018 Fourth Quarter GDP Growth Revised Downward


With all the concern about slowing GDP growth lately, investors have now learned that the fourth quarter of 2018 wasn’t as rosy as we had thought, and we only grew by 2.2%.

Reports about the economy aren’t written in stone when they get released, and a good example of this is with what we believed was the GDP growth number for the fourth quarter of 2018 that we were given earlier in the year, which came in at 2.5%.

This number already concerned the market, and while the number for 2018 that we were given hasn’t changed, this is more about the trend here. We grew by 4.2% during the second quarter, which dropped off quite a bit in the third quarter, and even further in the fourth.

To add to this concern, growth in the fourth quarter has been revised down to 2.2%, meaning that this downward trend is even more severe than we expected. Seeing growth shrink by 2% in just two quarters simply is not news that the stock market tends to like, regardless of whatever else may be going on.

What happened in 2018 should not really concern us that much, if at all, if we are looking to time our stock plays, because everything that could happen to us is all forward. Still though, the market will still look to price in any changes that may potentially affect our outlook ahead, and this is something that at least may be perceived that way.

The market took this news all in stride Thursday, and although it’s sometimes not that easy to isolate the effect of a single piece of news on markets that have so many things influencing them, we can at least say that this revision has not set many investors jumping off the train or stocks being evaluated substantially less because of it.

There are a few other things that we learned from this revision that does pertain to the outlook of stock markets though. The main driver of the downward revision was consumer spending coming in lower than was originally thought during this quarter, from a growth rate of 2.8% to 2.5%, and people spending less does have a real impact on the overall economy.

The growth in business spending also got trimmed, from 3.9% to 3.1%. The good news is that this is still a healthy number, and still outpacing overall growth, which is in itself a good sign. Still though, another number got revised in a manner which stock markets don’t particularly like.

Do We Really Need to be Rescued by a Trade Deal?

Concerns about the trade situation with China is thought to be the main reason for the reduction in business spending, even though we did see the growth in exports get updated from 2.6% to 2.8%. This tells us that in spite of the worries that are out there, exports remain pretty strong overall, and a little better than we had thought.

Some are saying that the impact of a trade deal will be a lot more modest than we may be thinking now, once the deal actually gets hammered out. This may end up being true, but a resolution will at least provide some relief on this front, which would be welcome right now.

There is a scenario where if the deal doesn’t impress that much, and the market has already priced in a more robust effect, we could see a sell-off precipitated, but probably not of a magnitude that investors at least should be too concerned about.

Former Morgan Stanley Asia Chairman Stephen Roach is among those sounding this alarm, and advises investors to be ready to sell once this deal gets announced, and perhaps should even sell now ahead of it. He does not see this trade deal as having a meaningful effect upon the trade relations of the two countries, but this should not really be a reason in itself to take his advice and be ready to dump stocks “very quickly.”

At best, we could take all this to mean that we’re in a situation where we should want to dump our stocks anyway and the trade deal will not really save us from this. Whether or not we’re actually in such an environment where things are so bleak that investors should ready themselves to bail at a moment’s notice, or even right now, is not so clear at all.

There are always reasons out there to exit your positions if you want to look for them hard enough, and the length of time that this bull market has lasted and the slowing down of economic growth that we’re seeing now may seem sufficient enough.

However, the bar for investors exiting their positions is a pretty high one. We’re told to hold for the long-term, and we at least need to be holding for the medium term, because the strategy of investors requires this. Investors are not traders, and don’t jump off just because the wind against them may be picking up a little, as it might be right now.

Events like this revision to last quarter’s GDP growth numbers therefore should not be seen as meaningful at all to investors. Their outlook is not next month, next week, tomorrow, or later today as is the case with traders, and when we look to provide them with advice, we need to realize this.

Investors Need to Only Care About the Big Stuff

While a pretty good argument could have been made for investors who are even focused on the long term getting out or at least reducing their exposure last fall, for the average investor, who knows little to nothing about how to time their investments, these situations can be very tricky for them to manage.

If we look to trade weekly charts for instance, this will have us in positions for several months at a time on average, which is what we call position trading, not investing. Anyone who sold in October and re-entered in December, as good of a move as that would have been, can’t really call themselves an investor, and few investors have the skills to position trade well at all even if they wanted to. This skill can be learned but does require quite a bit of learning and experience a lot more than none.

We may say that investors need to shorten their time frames and be more like position traders, but we can’t really can’t advise them as if they were one when they are not and do not even know how to become one. Investors can indeed time their investments, and while this does take some skill, it’s just a lot easier to do with bigger trends, as well as being more suitable for their time frames. The small stuff does not need to be sweated, and especially the very small stuff from a longer-term perspective.

Even the weekly charts are still holding up from December’s bounce right now, so we need to wonder what is so dire out there that we would want to even tell position traders to bail now, let alone investors with a much longer focus and horizon.

It may seem pretty slick to step up and proclaim the end of a bull market before it actually ends and then later tell us that you told us so, but there is really nothing out there that should concern investors anywhere near to the point where they should be grabbing their things and heading for the door like they would when the fire alarm goes off and they see smoke billowing.

The long-term picture still looks pretty good, and even less growth is still growth. Perhaps the growth of the stock market may slow in turn, but if we are in for the long run and the long run still looks pretty positive, we should not be so easily scared. We do not want to worry too much about things that don’t have much bearing on our focus, like the threat of a little pullback this year but things still looking pleasant enough over the next few years, where this crisis they are trying to sell us ends up just being a bump on the road that we need to be prepared to go over.

If this ends up being more than just a bump, and starts to look like a real hill, we will know it. Hills do come our way at times and it is good to want to jump off when we see the real ones but today’s terrain looks pretty flat right now from both a technical and fundamental perspective.

We do have to guess at least somewhat whenever we trade and invest, but it’s best to keep the guessing to a minimum, and especially not act too much out of haste and go with someone’s guess that may or may not be correct but clearly does not fit our investment style and objectives, or perhaps anyone’s, as even traders wait to see the actual smoke. There might be a hint of a fire smoldering but we’re still quite a way off from any real flames.