U.S. Second Quarter GDP Decline Biggest in History


The numbers are in for U.S. second quarter GDP, and it dropping 32.9% on an annualized basis is the scariest one ever. The stock market hasn’t been scared though.

Fear has played a bigger than normal role in 2020, whether that be the massive amount that COVID-19 produced, the panic that hit the stock market earlier in the year, or the deep concern that we have had for the economy, and not without reason.

Fear does serve a critical purpose, to direct us away from outcomes that have the potential to have a profound effect upon us, to help set our minds and bodies on a deliberate path to avoid danger and promote self-preservation.

It is perfectly rational and healthy to both react to present danger and to prepare for the potential for it in the future, to have us running away from it when it presents itself and have a plan in case it does later, but we tend to confuse the two a lot, going well beyond a plan to act if the need arises to being so prone to dwelling so much on it that it denigrates rather than facilitates its goal of preparing us to conduct our lives appropriately.

This confusion is so prevalent that it simply has been accepted as normal, with only those who suffer from this mental disorder to the extent that our paranoia becomes severely disruptive standing out. Worrying about a stock market collapse is one among countless things that people worry about, and constructive contemplation and destructive worrying are completely separate things, opposites even.

Examining how we might worry about our investments can also provide us with a lot of perspective on how we deal with worry in our lives generally, for instance how we might approach the potential loss of our job as we watch so many lose theirs, worry about catching a virus, or all of the other things that have people so focused on negative events to the point where they harm themselves notably.

Worrying about your stocks will take away from doing the right thing, as this takes your focus off of watching for the real tigers when your mind becomes so preoccupied with conjured up ones. Fear particularly disrupts our cognitive capacity, as it is designed for situations where very little thought is required, where a tiger or a mob of angry “protesters” are chasing you and the body favors the physical, the ability to run away from imminent danger, over contemplation, as this is no time to be doing much deliberating about what course of action you should take.

Running from tigers or angry mobs is a fundamentally different sort of danger than running away from news in the media or from stock charts, as the point of action with being afraid of investment risk does not require much of a physiological response, and directing our fingers to control a computer mouse or touching our screens of our touch enabled devices in a certain manner does not require that our autonomic nervous system direct all of our energy and focus to our muscles to be able to flee this danger like it does with physical dangers.

When we encounter physical dangers, we can perceive that our minds are held in a state of suspension, where it is forced to set aside thoughts apart from forming the intention to flee and then directing our amped-up muscles accordingly. When we allow this process to govern us when faced with dangers that do not require much of a physiological response but instead require a heightened state of cognitive awareness, and our cognition becomes suspended instead, we’re in for trouble because we have become less prepared to deal with real danger as a result of our response.

To say that a lot of people struggle with this is quite an understatement, and dealing with these things more appropriately requires that our focus be much more on the present than people tend to do. We spend far too much of our time trying to live in the future, and don’t even tend to pick pleasant thoughts about it, as this would be a constructive way to do it and would serve to calm our minds if anything, as we tend to choose a more destructive view of it, well beyond the need to contemplate appropriate future actions if confronted with various challenges.

It is one thing to consider possibilities in order to better prepare for them, like it would be with an evacuation plan in case of fire, as you don’t want to be starting at square one if something like this happens, at a time where your cognitive function will be suppressed. Some people are better at thinking clearly in the face of imminent danger than others, being cool under pressure as they say, but many do poorly in these conditions and it’s always better to prepare ourselves beforehand or at least have the confidence that you’ll be able to act well and not just have your mind frozen as you try to figure out what to do.

Many people feared a stock market crash on the horizon as 2020 came upon us, even though the market had been moving along quite nicely in 2019, where in spite of a few bad months, we kept moving forward overall.

Being afraid on purpose is never a good idea, being so prone and willing to envision the worst not just to visit it and come back home with a plan, but to remain there and live our lives outside of the present, which is what being afraid amounts to.

Not being focused on the present enough and being so psychologically out of sorts as a result of the inappropriate autonomic nervous responses that we place ourselves in by way of this temporal confusion will either have us overreact or freeze up, and this is no time to set aside cognition because this is the tool we rely on to save us and keep ourselves from hurting ourselves.

The threat of overreacting will have us seeing monsters which aren’t there, bailing when the threats aren’t substantial enough, but the biggest threat to us when we succumb to being afraid is how this has us freezing up by not being able to think our way through these things when we need to.

When the crash did finally come, many were caught like deer in headlights, as so many are when the real bears show up. Those of us who did prepare for this, who travelled ahead in time to contemplate what the best course of action would be if this happens, from the more deliberate perspective of a much calmer time, were ready for this, and there should not have been any fear response involved but a plan that was simply executed. We smelled the smoke, knew this was a real fire, and headed to the exit.

We might even want to completely automate this, for instance coming to the decision that we want to be out if we see a 10% pullback, and then place an open stop loss order to have a computer act on our behalf, preventing us from allowing the face of danger to preclude the quality of our actions.

We Remain Afraid Because We Are Afraid to Confront Our Fears

Fear in itself is actually a positive thing, even the most foolish of worries or the most blown up ones, because this is indicative of the fact that we have not prepared ourselves sufficiently for future danger, and the more we worry, the less prepared this tells us that we are.

We can contrast the more prepared with the unprepared to get a sense of this, where one investor actually does have a good plan or are confident that they will be able to deal with whatever comes along without flying off the handle. If you are afraid of things coming apart but fail to get comfortable with it, your fear is not at all impacted, as not being able to handle the future is indeed something that you should be afraid of.

The manner in which we choose our investing strategies needs to be in accordance with dealing with future threats, and if we choose no plan at all, like so many investors do, it is understandable that we will be afraid of crashes, just like we would be about our house burning down if the plan was to remain in the house and not even intend to flee.

Fear, like pain, is the body’s attempt for us to address a lack of some sort. If you are injured, the pain involved encourages us to take remedial action, to ease up on our activity so that we may heal for instance, or to take our hands off of a hot burner. Fear does the same thing on a psychological level, and in this case, it is pushing us toward a more appropriate cognitive response.

In the investment world, fear impacts us a lot more than just wondering what we will do when the bears come. Popular investment strategies themselves are actually dominated by fear, but like other irrational behaviors, this becomes normalized to the point where it just becomes accepted without any real questioning.

We may start by being worried about how we’ll fare in retirement, and very often these concerns are very real and appropriate, where the path that we are on will very likely leave us with our head in our hands when we arrive. Our perception of this threat and the actual threat are aligned here, but while we should use this as a sign that we need to take our hand off the stove, we instead choose to stay the course and just bear the burden both now and then.

If we instead have the presence of mind to realize that we have to change our course to give ourselves a better chance to succeed, working back from where we need to be to discover the right path, we’ll at least be doing our best, instead of living in a cardboard box in an alley of a nice hotel wistfully looking up at it in the midst of depression and hopelessness.

We can also just approach this from the present and just look around to see what the best opportunities are, and with a clearer mind, succeeding with investing can be made so much easier. People are afraid of all of the side roads, no matter how much better they may be to go down than the much more beaten down path that they insist on holding hands with so many others even though they may all be headed off a cliff, or at least moving in a direction toward a poorer section of town.

We may look down these roads, and we can use investing in the Nasdaq over the S&P 500 as an example even though there are countless examples of this, and be more afraid of better paths, just because they see fewer people travelling down them.

We hear things in the media like international stocks looking better than the S&P 500 even though the Nasdaq is slamming both, even mentioning this in their recommendation, and suggesting international stocks anyway, and while the reason for striking the Nasdaq off their list isn’t mentioned, it is obvious that they are too afraid of it, even though only by way of lame rationalizations.

This is another case of not living in the present, and instead projecting our fears forward and acting as if we were at that point down the road instead of the point where we are at now. If we’re trying to get as far down the road as possible, we should not worry about a fast car breaking down on the road later, where we just can call roadside assistance and be much further ahead on a net basis even when this happens.

The better an investment is doing, the more investors tend to be afraid of it, and they allow these irrational fears to deprive themselves of a great deal. They may look back upon the past and wish that they had more courage, just like they will look at today’s fear driven decisions made today in the future and wish the same thing, but just wishing for the past to change doesn’t get it done.

Ironically, letting fear drive our decisions actually requires a lot more courage than investing from the perspective of the present, which is actually a considerably safer way to do it. We should never be afraid of seeking a more sensible course of action, but we should be very afraid when we choose not to.

The market is also driven by fear at times, and the stock market is actually pretty skittish as we have particular seen this year, but we saw the same thing last year with the way that they sweated every little issue with the trade talks. We need to respect this fear, and if the market is afraid but we are not, we are in a lot of trouble and we need to act on their fears rather than look to minimize them, because the market holds our results and our future in their hands.

There is a big difference between seeing irrational fears manifest and reacting to them, as observers, and being a party to these fears and allowing our own judgements to be clouded by this. We need to be well versed in the impact of market fear upon the value of our investments, we just need to avoid imparting our own.

The fear that a lot of individuals had in 2019 did not really materialize, and being afraid during this time was counterproductive, even if this meant hanging on and worrying as such things at a minimum affect the quality of our lives if not our portfolios.

The market did run scared earlier this year, to say the least. When we become afraid but the market does not, we end up doing the wrong thing, but when the market is afraid when we are not, that’s even worse.

The fear gauge with the market has been remarkably muted lately, especially when you consider that we’ve just gone through the worst quarter economically in history. We might look upon these horrible results, with GDP falling in the second quarter by the remarkable amount of 32.9%, and allow this to have us very afraid, but we need to see how the market is taking this as they are the ones that decide what happens as a result of anything.

Our Market Fears Don’t Matter, the Fear the Market Has is What Matters

To put this number in perspective, over the last 10 years, not including 2020, U.S. GDP has grown by a total of 22.8%. 32.9% is one and a half times that, 15 years of this growth pace that has spurred one of the biggest and longest lasting bull markets in history.

Since the start of the second quarter, on April 1 until now, the Nasdaq 100 has moved by 41%, not losing that much but gaining that much, during a quarter that has been the worst one we have ever seen, a monumental economic loss for the ages. This has surely not scared the stock market, and that is enough, it’s the only thing that matters in fact.

This number has been no surprise, and even back on April 1 economists were forecasting numbers that looked just like this, and when the actual number came in, the only surprise was the amazing accuracy that our forecasts had. The number on the street had been around 35%, and the actual results came in a tad better.

This is no normal recession though of course. If it had been, this would be simply a disastrous number, and it actually may be appropriate to annualize it in the way people are doing, as huge spikes down in GDP just do not resolve themselves very quickly as the conditions that produce these things normally persist for quite a while. This is Great Depression kind of pain, and that lasted for a decade and would have gone on longer if not for WWII stimulating the economy as much as it did.

This one is of a far more temporary nature than the norm though, even though the conditions that caused this still persist to a concerning degree. We’ve opened up a lot more but are still a good way away from recovery, which may not come for a while. We were on track for a total gain of about 6% in the three years between 2020-22, where current projections are only predicting a net total of 2%.

This would at least suggest that we should be in a worse place than when we started the year and expected another small increase in GDP growth that we have been accustomed to over the last decade, instead of seeing 2020 GDP change wipe out not only this year’s expected growth but several other years as well.

The divergence between the economy and the stock market should tell us beyond any doubt that this game does not work the same way that just about everyone thinks it does. If the stock market is scared, it will run, but it needs to be afraid enough to do so first. When it does not, like it certainly isn’t now, this should not twist our minds so much, we should not even need to try to reconcile this, as none is necessary if we understand.

The market not being spooked is enough of an explanation, because it is the only explanation there is. It often will be very afraid of GDP going down, like it was in 2008-2009, where it shrunk by 2.6% and that was enough to call it the Great Recession, but it is not scared at all this time around, even though the current number is 12.7 times bigger on an annualized basis.

This is not a case where it is appropriate to annualize this number by multiplying by 4, as this quarter has been particularly wounded. The actual drop in the quarter was only 9%, and while portraying it as 32.9 under the assumption that this level of decline will continue on for three more quarters is quite disingenuous and not even based upon the facts, losing almost a tenth of the country’s GDP in a single quarter is scary enough.

If we really want to know where we are expected to be at in 2020, you have to look at the actual data, and the Fed is as reliable of a place to get U.S. economic data as there is. The Fed pegs the loss this year at 6.5%, which is two and a half times as bad as the Great Recession was, making this one considerably greater than great.

That would be plenty enough to be scared about if these things were in themselves something to fear apart from the fear the market is feeling. This will be our worst year economically since 1946, where the end of WWII saw the U.S. economy pull back from its frantic war-time pace to a more normal one and just offset some of the excessive growth that the war caused, an average of 15% per year in the 4 years that the United States participated in.

This therefore does not need to be embellished at all, as this is an epic economic loss looking at the real numbers, and if you told people at the beginning of the year that we would shut down our economy for months and experience the biggest economic loss by far in 74 years, this would scare the daylights out of investors.

If you told them they would be chained to the Nasdaq 100 over this time, a prospect that they find scary enough in itself at the best of times, they would simply be horrified, but it is because they do not live in the present and do not let the market itself guide them.

Perhaps seeing this index up 23% on the year so far might have them struggle to get out of their bonds a little less, but they are still scared of this index, still projecting their fears upon it rather than letting it decide for itself how much it wishes to be afraid.

The actual GDP number coming out, even though it was no surprise at all, did rattle some people initially, and we did see a sell-off, those using their own fears to guide them. The index overall collected itself and overcame this deficit in the same day and then some.

In the face of this horrible GDP number, more bad unemployment numbers, COVID daily cases remaining at all-time highs, all the other worries out there about this virus, all the nightly riots, the gridlock with the stimulus bill, worries about China, the prospects of a Biden presidency and the Democrats taking the Senate as well, and everything else, the Nasdaq is still not afraid.

AMD, our top pick for 2020, has especially not been afraid, up 72% on the year now. It’s 187% gain in 2019 made it the biggest gainer in the market by a long shot, and this is the sort of thing that particularly terrifies investors, but we let the investments themselves tell us how they are doing, and especially love great report cards like AMD’s 2019 one was. We loved this stock in 2019, we continued to love it at the start of this year, and still do now, but this love is contingent upon being shown love back, and AMD certainly has shown that it continues to deserve it. When this comes to an end, that’s the time to go, with your pockets full.

Apple, another of our 5 picks for this year, has been at the head of the class for a lot longer, and with this stock, people are afraid to put too much of their money in it and use it more as a garnishing, like the way it garnishes the S&P 500 with its 6% of the index. They need to look back and see how much they have missed by not serving themselves up with much bigger helpings of the best stocks, but they are just too afraid.

Apple has now broken through both $300 and $400 a share this year, and after their earnings were announced after the bell on Thursday, they added another 5% in just a couple of minutes in after-hours trading. The self-styled experts have been steering us away from this for quite a while now, simply because they were afraid that there would come a time where their visions of it going down would come to pass, although those who base their fears upon what happens in the real world see past this paranoia.

Amazon did the same thing with their earnings on Thursday, going up another 5% in a few minutes after their earnings announcement. These stocks just keep going up, their business results keep going up, and the only thing to fear with them is fear itself, but this remains a mighty force in the minds of almost all investors.

We need to point out again that this is going on just after we went through the worst quarter economically in history. When the milk sours, the cream really rises to the top. People want their money in good stocks, and when the field thins and there are a lot less of them, they attract even more bees and churn out even more honey. If you want to live in the land of milk and honey, you need to choose it first. If you want performance, you need to seek it.

You can put all of your money in a few top stocks and do not have to be afraid of anyone but yourself. If the stocks get afraid, like they did in February, and you are not afraid that you will do something stupid and not heed their fear, and get back in when the fear subsides, you can actually put yourself in a position where you no longer have to fear your retirement, while those who settle for terrible advice and piddling returns based upon our culture of fear, when they need so much more to succeed, have already doomed themselves.

Even doing nothing in a plan like this has simply bashed the average portfolio, and it’s a lot better to be up 30% or more while others are still underwater and gasping for air. Add in half a brain to sidestep the COVID market panic and you could have doubled that. We’ve been sold a pig in a poke instead though by the investment industry, and happily roll in the mud with it and don’t even mind the smell.

We need to ask ourselves why we would never consider such a thing or anything remotely close, and even something like putting all your money in the Nasdaq when it is running well would even be too frightening for most investors, and the answer always is that we are too afraid, and we’ll continue to be unless we confront and understand these fears enough.

If success terrifies you, as it does with so many investors, you indeed have much to fear. This is all far easier than people make it, it only requires us to actually pay attention to what is going on, a task far more challenging than it appears as it turns out.

Success favors the bold, but this isn’t even as much about being bold as it is not being stupid. It doesn’t take much courage to live in the present and to invest in the present, it requires only awareness, but won’t ever happen if we are too afraid to be aware.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: ken@marketreview.com

Areas of interest: News & updates from the Federal Reserve System, Investing, Commodities, Exchange Traded Funds & more.