Market Beat: Understanding the Quarterly GDP Report
August 24, 2012
TRUCKEE, Calif. andamp;#8212; The stock market is considered to be a forward looking indicator. What that means is that the current price of the market is based on how the economy is forecast to be in the next six to 12 months. If it looks like the economy is improving, the market will rise, and if it looks like the economy is weakening, the market will fall. So, how do market participants determine the direction of the economy? Use a crystal ball? It would be nice to be able to see into the future at times.Market participants study a variety of economic reports that are released on a regular basis to gauge the economic environment. One of the most important ones is the quarterly GDP report. GDP stands for gross domestic product. This report is released every three months after the close of the calendar quarter.Market observers watch this report for direction of the economy. If the number is negative, it indicates that the economy is contracting, and we are in a recession or even a depression if it is contracting enough. If the number is positive, as it is right now, it means that the economy is growing.The most recent report was released on July 27 and indicates that the economy is slowing. In the last quarter the economy grew at an annualized rate of 1.5 percent, down from the previous quarter when it was at 2 percent. For comparison, the economy contracted at a rate of -5.3 percent in the last quarter of 2009, contracted slightly in the next quarter and has been growing since then.Since the 2012 second quarter report was released the market has moved higher. So, you may ask, if the report showed that the economy has slowed somewhat quarter over quarter, shouldnandamp;#8217;t the market see that as a negative and decline? That is a good question. One reason that the market has gone up since July 27 is that a slowing economy increase the chances of more stimulus from the Federal Reserve, so it creates kind of a conundrum, where bad news can be good news.Since the recession, the Fed has completed two rounds of whatandamp;#8217;s known as QE, or quantitative easing. If the economy continues to slow down the Fed has indicated that they will take whatever steps are necessary to keep the economy growing. Watching the GDP reports every three months and paying attention to statements that the Fed makes can help to understand market action.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.