The revised GDP numbers for the first quarter came out last week and were a tad disappointing. Gross Domestic Product (GDP) receded at a -2.9 percent annual rate. That was the sharpest drop in five years and has been blamed on the record cold winter in many parts of the country.
Unfortunately, the Tahoe region didn’t partake in the harsh winter that the East Coast had. We were warm and dry with mediocre ski conditions. We may have an El Nino forming this year that could bring better skiing and some relief to this drought; let’s hope anyway.
The GDP numbers released last week were the third revision and the difference between the first estimate and the third estimate was substantial. The first estimate showed the economy growing at a rate of 0.1 percent; that’s a 3 percent difference, and the divergence between the second and third estimate was the largest in almost 40 years.
There is a relationship between stock market performance, GDP and inflation. GDP and inflation are primary factors that lead to earnings growth. Corporate earnings are the main driver of stock prices.
Earnings for the second quarter will start getting released on July 8, when Alcoa will kick off the earnings season with its announcement. The earnings reports will be followed closely, not just for profits, but also for revenue growth.
I believe, if the economy is growing and there is some inflation, then corporate earnings should also be growing, and that is positive for stocks. Hopefully the recent decline in GDP is temporary, and next quarter we’ll get back on track for growth. If growth continues to be sluggish, we could always try to augment the economy the way the British and the Italians do.
In those countries, they add the underground economy into their official GDP calculation. A recent article in the Los Angeles Times said that Britain added $16.7 billion to their economy by tallying illegal activities, including drugs and prostitution. Italy has now decided that they will follow suit and will commence counting illegal and underground activities in their October report this year.
It doesn’t give me a lot of confidence in them if they can’t find a better way to grow their economies than that. Let’s look forward to a good second quarter earnings season and seeing our GDP growth kick in next quarter without having to add illegal activities.
Hopefully, we’ll get that El Nino, too.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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