Slow Growth Hiding Under a Bursting Stock Market By: Gabriel PotterMBA, AIFA® 2020.08.25

Stocks are on a tear, hitting all-time highs in the concentrated technology heavy indices, there do appear to be some signs of real-world economic slowdown.  Still, the economic bounce-back, while positive, is leveling off.  In other words, the stock market may have a “V” like recovery, but the economy isn’t.  In most circumstances, we might expect economic growth to resume by the end of this year or early next year, but it shouldn’t reach pre-COVID output for a few years at least.

Let’s look at recent data about where the economy is positive but slowing.  For instance, the Chicago Fed National Activity Index fell more than expected in July.  Readings indicated positive growth still, but industrial production and employment improvement is happening slower than expected as the summer burst of coronavirus tamped down behavior. 

Over the past few weeks, we’ve written about the impact on the delay of Federal unemployment benefits.  The recent direction of $40 billion from disaster relief to unemployment supplements is already delayed.  Goldman Sachs’ recent article calls the action “too little, too late for August spending”.  Again, Goldman Sachs suggests incomes won’t rise from this targeted benefit until September.

It’s entirely possible that stocks and other securities can advance even without economic improvement for a number of reasons including mandated buying programs from the Federal Reserve, concentration of a mega-sized national vendors for goods and services at the expense of local economies, and good old-fashioned hope (in this case, for an effective coronavirus vaccine).  Let’s hope that the disparity between stock market prices and economic fortunes don’t become too great.

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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