GDP Growth Not Likely to Last; Victor’s Market Outlook

the Curmudgeon with Victor Sperandeo



The Commerce Department reported Friday that 3rd quarter GDP grew at 2.9% annual rate. That number will be subject to two revisions over the next two months. It represents one of the last major economic reports to be issued before U.S. voters go to the polls on Nov. 8th.  In this post, we provide three assessments of GDP and the economy followed by Victor’s stock market outlook.


GDP Analysis (Curmudgeon):


The GDP improvement over the previous two quarters was powered by a rebound in exports and a decision by businesses to restock their shelves.  While the 3rd quarter GDP number was slightly more than double the 1.4% rate in the 2nd quarter, the details of the report indicate that the pace is unlikely to last.


·       The rise in exports was fueled by a surge in shipments of soybeans to South America. That's not likely to happen again.

·       Consumer spending growth slowed from a breakneck pace in the second quarter.

·       Business investment was barely positive, still trying to recover from sharp cutbacks in the energy industry after oil prices plunged.

·       Home construction also contracted for a second quarter. 

·       The strength in inventory rebuilding also looks to fade in coming quarters as businesses are not confident of the demand for goods produced.


Gregory Daco, head of U.S. Macroeconomics at Oxford Economics, said the 3rd quarter results "may be as good as it gets in 2016." He forecasts slower growth of around 2% in the current October-December (4th quarter) period.  "Going forward, we expect a modest expansion in economic activity, but we note the economy may be in a fragile equilibrium," Daco wrote in a research note.


Our conclusion is that the U.S. economy has likely peaked for the current 7.75 year “expansion.”  Independent of our next President, fiscal policy will likely continue to be straitjacketed, null and void, while the Fed has no monetary tools left to stimulate economic growth.  Please pay careful attention to Moody’s analysis below.


John Williams ( Comments:



A Little Bit of Exaggeration Here? (John Williams):


“With headline real annualized quarterly growth of 2.90% in the initial reporting of third-quarter 2016 Gross Domestic Product (GDP), the real GDP now stands 11.41% above its pre-recession high of fourth-quarter 2007. Such has resulted from highly creative reporting by the Bureau of Economic Analysis (BEA), in the context of a variety of private and public indicators that show the broad U.S. economy never fully recovered from the economic collapse into 2009. Further, following an extended period of low-level stagnation, broad economic activity began to turn lower again in December 2014, a month that eventually should be recognized as the beginning of a “new” recession.”


“Even allowing for heavily-modeled and guesstimated fudge factors such as “intellectual properties,” and guesstimated “healthcare” and other services that lack solid reporting bases, it is difficult to see how the GDP has recovered to 11.41% above its pre-recession peak.”


Moody’s - Shareholder Take Soars as Cap Ex Stalls:


Where did (economic) growth go? In response to a much-diminished outlook for economic growth and the related need to stoke shareholder returns, the ratio of shareholder compensation to capital spending has jumped sharply since 2004.


For the span covering 1984 through 2004, shareholder compensation — the sum of dividends and net equity buybacks — supplied by US non-financial corporations averaged 33% of capital spending and varied between a Q2-1992 low of 17% and a Q2-1999 high of 53%.  By contrast, since 2004, shareholder compensation has averaged 60% of capital spending undertaken by non-financial corporations, wherein the ratio has fluctuated between a Q1-2010 low of 39% and Q4-2007’s record high of 88%.


The near stalling of capital expenditures stems from lower than expected business sales, which is the principal driving force behind the ongoing shrinkage of operating profits. Notwithstanding the latest contraction of profits, corporate debt continues to grow materially. The longer debt expands while profits contract, the more problematic becomes the outlook for credit quality.  Nevertheless, despite the now simultaneous inflation of debt and deflation of operating income, high-yield has rallied mightily from its lows of earlier in 2016.  Debt grows as profits shrink for a fifth time since 1982.  For the year-ended June 2016, US non-financial corporations showed a 6% annual increase in their outstanding indebtedness that differed radically from their -9% annual drop in operating profits.


Victor’s Comments:


As some economists’ 3Q GDP estimates were as high as 3.0%, the stock market did not care that much after the 2.9% GDP number was released. The markets then traded slowly higher until the news came out that FBI Director James Comey made a written statement to Congress that the FBI was re-opening the email investigation against Hillary Clinton. That caused the S&P 500 to decline.  The cash index closed at 2,126.41, down 0.31% on the day.


Going forward, I believe the market trades bullish if Hillary appears to be winning the Presidential election, and trades bearish if Trump starts gaining.


HOWEVER, IT DOES NOT MATTER WHO WINS IN THE SHORT RUN.  The markets and the economy will both turn down together starting in December as per the reasons I noted in my October 16th co-authored Curmudgeon post.


One piece of meaningless news is the Fed meeting next week, which will amount to punting to the December 13-14th Fed meeting for a (most likely for now) rate hike.


For the record, here are the closing highs for some of the more popular U.S. stock indexes along with date and current % decline from high in parenthesis: 



For the record, the Dow Theory is still on a Bear Market signal.


Victor’s Outlook for the Market & Economy:


My view reiterated: the markets and the economy will begin to decline in December after the Fed meeting. It is likely that the highs for the markets have already been made (see above list).


If Hillary loses, the decline will accelerate, and if she wins a rally will likely occur that "may" test some of the highs on a few important stock indexes.


The question is when to go short stocks? Not yet.


It would be prudent to see how Hillary's new email scandal plays out next week before taking a short position via index ETFs, inverse ETFs or stock index futures. 


Also, I still believe the Fed (and the Plunge Protection Team) will protect the market from a serious decline till after the election.


Good luck and till next time...

The Curmudgeon


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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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