On Thursday, October 29, the Commerce Department announced the highest GDP growth increase ever. The U.S. Gross Domestic Product (GDP) for the quarter ending September 30, 2020, increased 33.1%, slightly beating economists’ estimates.
Consumer consumption, which accounts for approximately two-thirds of GDP, was a key contributor to the large GDP growth, with spending increases seen in healthcare and goods (motor vehicles and parts). Business and residential investment and exports had nice gains as well.
An increase this large would typically bode extremely well for an economy, but unfortunately, other factors need to be considered.
Much of the increase was due to the reopening of the economy towards the middle to end of the second quarter. Second-quarter GDP contracted 31.4%, so the third-quarter increase still leaves the economy 3.5% lower than where it was last December.
The resurgence of positive COVID-19 cases across the country could derail GDP growth once again, especially if states begin to lock down parts of their economies to battle the spread of the virus.
Uncertainty remains, despite the good news. Will the economy contract in the fourth quarter if businesses are forced to shut down again due to spikes in the number of positive cases? Countries such as France and Germany have implemented strategies that include recent shutdowns and curfews, both of which are not good for economic growth. Some localities and states in the U.S. have either done the same or hinted at doing the same, suggesting the economy remains fragile at best.
As far as the stock market is concerned, it is important to remember that GDP growth is considered a lagging indicator for stocks. Stock traders typically look to where they think the economy will be in the future rather than where it has been when determining whether to buy or sell stocks.
It is why markets have risen since the lows of mid-March, expecting that businesses will reopen soon. It is also why markets have pulled back in recent days, amid concerns about the spread of the virus shutting down the economy once again.
Do you feel nervous? Here is some more food for thought regarding what to do during times of extreme market volatility.