Stocks rallied yesterday after the GDP report for Q2 came in negative prompting investors to buy on hopes that the Fed will end its hiking campaign early. The negative GDP report puts the US in a technical recession – technical is not always bad for stocks.
Semantics. Earlier in the week, President Biden said that the US was not in a recession…OK. Later in the week, Fed Chair Powell said that he didn’t think that the US was in a recession…OK. Yesterday, the Bureau of Economic Analysis released its first estimate of Q2, annualized quarterly change, inflation adjusted Gross Domestic Product (that is a mouthful, isn’t it), and we learned that the US economy contracted by -0.9%. Economists were taken by surprise, as they often are. My regular readers are well aware of my respect for economists – not so much my faith in their ability to accurately forecast. That aside, regardless of what economists were expecting, the contraction represents a second consecutive quarter of negative growth, which is generally accepted to mean that the US is in a recession. Was this GDP the kiss of death for the US economy? Was the President just pulling a political stunt and was the Fed Chairman just trying to smooth over his fears with kind words? That is a tough question to answer, because there is no real, official definition of a recession. Though the 2 quarters down thing is generally accepted, most Wall Streeters rely on the pronouncements of the National Bureau of Economic Research (NBER) for the official declaration. NBER is a private organization that relies not only on those GDP numbers, but also on several other economic growth indicators. Ultimately it is up to a committee to make the official declaration, which could, in some cases, come many months after the events came and went. So, let’s not get caught up in “he said, she said” or a scary word, and look at the REAL numbers and see what we can learn.
Basic economic refresher: GDP is made up of Consumer Spending (C), Private Investment (I), Government Spending (G), and Net Exports (NX). You simply add those up to get Gross Domestic Product (GDP = C + I + G + NX). I know that seems overly simplistic, but it is ACTUALLY the way that GDP is calculated. Of course, collecting all those number is not easy, which is why it is released several times with refinements in each iteration. In yesterday's release, we learned that Consumption (C) grew by +1% after growing by +1.8% in the first quarter. That indicates that Consumption is slowing but still growing, which is good considering that Consumption makes up more than 2/3 of GDP. Government Spending (G) fell for a second straight quarter by -1.9% (-2.9% in Q1). This is largely controlled by Washington DC, and it can be moved up or down with the stroke of a pen. Additionally, it makes sense that the number is declining given the oversized spending that came with pandemic stimulus and response – spending is declining back to normal. Private Investment (I), generally speaking, is capital spent by companies on things like buildings, capital projects, equipment, and even R&D. It can also include capital investment made by you and me on things like houses, farms, etc. Yesterday, we learned that Investment DECREASED BY -13.5% after growing by +5.0% in the first quarter. This one is an eye opener, and the likely cause of the negative print. Though Private Investment represents some 20% of GDP, a decline like that warrants a closer look. Looking down the list for standouts on all the items that go into the larger aggregate, we note that Nonresidential Structures Investment declined by -11.7% and Residential Investment (homes, single and multifamily) fell by -14.0%. Those items are largely tied to interest rates as they are most often financed with debt in one form or another. This could indicate that the Fed’s rate-raising activities are taking their toll…BY DESIGN. Unfortunately, the reality is that it is really consumers that will ultimately cause inflation to pull back, and while +1.0% can hardly be considered strong, growing but at a slower pace can also be an indicator that prices may soon ease up without a full collapse of the economy…also BY DESIGN. Note: I left off Net Exports (NX) purposely, as it is typically a small impact on GDP and has been subject to lots of vagrancy since the Ukraine war.
It is far too early to see if this trend in reduced private investment will continue to slow economic growth. Indeed, it is also far too early to know if Consumption with fall into negative territory. One thing we do know, is that, so far at least, employment remains strong. That is one of the factors NBER uses to determine whether the US is really in a recession. Should that deteriorate in the coming months, we can expect the President and the Fed Chairman to change their tunes. For now, the markets don’t appear to be phased by yesterday’s release. As is typical, traders are looking beyond the recession and betting that the Fed will end its hiking cycle earlier than expected. Stay tuned and stay vigilant.
WHAT’S SHAKIN’
Amazon.com Inc (AMZN) shares are higher by +11.48% in the premarket after it announced that it beat EPS and Revenues by +2.24% and +1.39% respectively. We also learned that Amazon’s ad business is growing. The company expects to continue to hire IT professionals, especially in its cloud-related businesses. Finally, the company offered upbeat guidance for the current quarter which was within analysts’ expected range. Potential average analyst target upside: +40.8%.
Apple Inc (AAPL) shares gained +2.45% in the premarket after it announced that it topped estimates for EPS and Revenues by +3.58% and +0.24% respectively. Though sales of phones are lower than hoped, the company still managed to eke out some modest growth. Dividend yield: +0.58%. Potential average analyst target upside: +13.6%.
Intel Corp (INTC) shares are lower by -11.21% in the premarket after the company announced that it missed EPS and Revenue estimates by -57.45% and -14.72% respectively. The company provided current quarter projections that were lower than estimates as well. Additionally, Intel lowered full year guidance for Revenues, earnings, and margins that were below analysts’ targets. Dividend yield: +3.67%. Potential average analyst target upside: +5.5%.
ALSO, this morning: Chevron Corp (CVX), LyondellBasell Industries (LYB), Booz Allen Hamilton (BAH), Phillips 66 (PSX), and Colgate-Palmolive (CA) all beat on EPS and Revenues. Revenue results were missed by Exxon Mobile (XOM), Newell Brands (NWL), and AbbVie (ABBV), while Proctor & Gamble missed EPS targets.
YESTERDAY’S MARKETS
Stocks rallied yesterday after a weak GDP number sparked hopes that the Fed would back down from its intended hiking frenzy. The S&P500 rose by +1.21%, the Dow Jones Industrial Average climbed by +1.03%, the Nasdaq rose by +1.08%, and the Russell 2000 Index advanced by +1.34%. Bonds gained and 10-year Treasury Note yields slipped by -10 basis points to 2.27%. Cryptos added +6.92% and Bitcoin climbed by +5.48%.
NXT UP