The markets can remain irrational longer than you can remain liquid
First there was concern over a default of US debt…and Treasuries rallied. Then there was concern over a downgrade…and Treasuries rallied. Then we got a brutal downward revision of GDP which should kill anyone’s expectations for robust corporate profits…but after only a very brief drop…stocks rallied back to be slightly up on the day. It’s like it’s “opposite day” in the markets. The headlines would have you think that our market is like the Titanic…but the way money is flocking to us you’d think we were the last helicopter leaving the top of the embassy.
The 10-year Treasury is currently trading at a 2.86% (after hitting a 2.84% this morning) and the NASDAQ is up 2.8 points on the day. Unemployment is high, housing is in the dumps, GDP is falling, and the NASDAQ is up…if anyone can explain the stock market to me I would really appreciate it.
In the words of super-spy Maxwell Smart we “missed it by that much”.
GDP was released this morning at 1.30% vs. a survey estimate of 1.80%. As bad as that is…it’s nothing compared to the downward revision of the prior number that we also received this morning. GDP was released last quarter (March 2011) at 1.90%. At that time the comments from the Fed were that this indicated that the recovery was underway but not as robust as they’d like, and that they viewed the sluggishness as transitory in nature. This morning we got the revision of 1Q GDP. It was released in March at 1.90%...the revision today showed the actual number was 0.40%. That is a dismal figure. You’ll recall that the technical definition of a “recession” is two consecutive quarters of negative GDP. I was going to say we inched closer to that threshold today with this revision but that would be inaccurate. We took a hop-skip-and a jump toward that threshold with todays downward revision.
As we’ve written in the past there are a few FOMC members who have outlined their triggers for another round of quantitative easing. These triggers revolve around the Feds dual mandate of maximizing employment and controlling inflation. A GDP figure of 0.40% will not create jobs, and it won’t push inflation up to levels that the Fed feels is consistent with their mandate. This type of GDP figure is going to make some FOMC members talk a little more boldly about another round of QE. I don’t view more QE as imminent as there doesn’t appear to be much appetite among the majority of FOMC members for such a plan…but at the least the timeline for the Fed raising rates looks to be even further away than it did last month.
While we may not slip back into a recession it’s important to keep our perspective. Even if we avoid the technical definition of a recession, there will be plenty of pain to go around if we just limp along at low levels of GDP.
That’s the news for this morning. If you have any questions or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
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