If you had a hangover from the first month of trading action, the latest round of gross domestic product (GDP) figures may have aggravated your churning stomach. Last Friday's report on GDP, the broadest economic measure, revealed that the U.S. economy grew at an anemic 0.7% rate in Q4. That reading followed a 2% gain in Q3 and a 3.9% gain in Q2.
Should you be worried? For now, S&P Economics continues to place the odds of a U.S. recession at less than 20%. They still expect a falling unemployment rate, improving wage growth, firming consumer confidence, and a solid housing market. That doesn't mean the economy is out of the woods, however. Plenty of economic headwinds remain, and that means traders and investors may need to be more selective in the market right now.
First: The Positive Factors
The GDP data showed personal consumption expenditures were up 2.2%. Translation? People were finally spending more of the savings they racked up at the gas pump. "We are starting to see consumers put that money to work," says JJ Kinahan, chief market strategist at TD Ameritrade.
Despite the January market turmoil, industry economists remain generally upbeat about the prospects for the U.S. economy this year. "The good news is what our economists see ahead," says Sam Stovall, managing director at S&P Capital IQ. "We see the unemployment rate continuing to fall and approaching 4.5% by the end of 2016. We also see wages rising by more than 3% by the end of the year. Wage growth will exceed inflation by a good 1% in our view, and that allows consumers to increase spending."
Second: Still Tread Lightly
The latest round of weak U.S. growth numbers is also a stark reminder that GDP growth during this expansion is well below the average growth of prior expansions. "We are finding that the low trajectory of GDP growth makes it vulnerable to dangerous downdrafts," Stovall says.
Kinahan pinpoints the presidential election as a factor that could ramp up uncertainty and potentially weigh on fresh business investment and spending, especially against the backdrop of below-normal GDP. Businesses tend to hold off on new investments during election cycles because of uncertainty about the regulatory environment ahead, Kinahan says. "Businesses tend not to go 'all in' as they wait to see how the new administration could approach the regulatory environment. The presidential cycle might have an impact on how well GDP does this year."
The key takeaway for investors? "For your long-term investments, stick with established companies. With start-ups, including some in the biotech sector, investors need to be more selective. Established companies-some, not all-theoretically have the expertise to handle the change and uncertainty that can come with a new administration and potentially a new regulatory environment," says Kinahan.
Tools of the Trade
Want to hypothetically time travel to revisit past market behavior? TD Ameritrade provides the thinkorswim® platform's thinkBack tool to analyze and back-test how stocks have performed historically tied to specific events, such as GDP releases, elections, or even under Democratic versus Republican administrations (Figure 1).*
Investors can also look to the old market adage: Economic expansions don't die of old age. Rather, they're often killed by misfired Fed action or some other likely suspect, such as high oil prices, which the economy currently doesn't face.
For now, "we don't see the end of the U.S. economic expansion coming any time soon," say Standard & Poor's Rating Services economists in a research note.
FIGURE 1: MARKET TIME MACHINE. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
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