GDP Report Shows Anemic Growth

by: Zachary Scheidt

Traders are reacting to Friday morning’s adjusted GDP report which shows slower growth than originally reported…

Gross domestic product, the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 1.6% from April to June, the Commerce Department said Friday…

Friday’s report also showed that companies barely managed to post profit gains, following several very profitable quarters. After-tax earnings edged up 0.1%, well off the previous quarter’s gain of 11.4%. First-quarter profits were revised down from the initial estimate of a 12.1% increase. – Wall Street Journal

The news initially caused markets to trade lower, giving traders with overnight short positions a nice payday. However, the market began rallying after Chairman Ben Bernanke began speaking in Jackson Hole.

Ben BernankeThe committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.

Additional accommodation” likely means new stimulus plans aimed at supporting consumers who are struggling under the weight of home loans which often carry a notional value much higher than the market value of the existing residence.

Stubborn unemployment is also a major concern as corporations continue to stockpile cash instead of investing in growth and increasing hiring. Many workers are seeing unemployment benefits running out and a significant portion are using part-time or temporary jobs to make ends meet.

Consumers are often faced with the tough choice of defaulting on existing obligations or taking out short term payday loans to bridge the cashflow gap.

Additional stimulus from the government may in fact help our economy (and by extension the equity markets) in the short run, but in actuality this intervention has to be paid by someone. Either the Federal government is forced to continue to borrow with countries like China offering us massive sovereign loans, or the other option is to print currency.

The printing option is particularly frightening because the value of the US dollar could sharply decline. This would be damaging to savers who have accumulated nest eggs which could eventually have much less purchasing power.

Investors should be very careful when it comes to protecting their capital. Owning hard assets such as agricultural commodities or precious metals can be a good alternative – or owning the stocks of companies with exposure to the area. Overall, risk management is the key as we trade our way through a turbulent environment.