Q2 GDP Not as Bad as Expected, But Still Disappoints

Economists and investors alike were prepared for a terrible GDP reading for the second quarter. The economic lockdowns that were put in place in an effort to halt the spread of the COVID-19 virus were going to take a toll, there was no denying that. The consensus estimate for the quarter was for 35% contraction in economic activity, but the actual figure was a little better than expected with a contraction of 32.9%. I had expressed to a friend in a social media exchange that I felt like the expectations for GDP were so low that it would be hard to disappoint.

I stand corrected. In early trading on Thursday the all four of the main indices were down over 1.0% with the Dow dropping over 5oo points at the lows. Of course, not all of the losses can be attributed to the GDP news, but it certainly didn’t help matters.

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Initial jobless claims for the week came out at the same time as the GDP report and for a second straight week, the number of claims increased. Initial claims had fallen each week for almost four months. Continuing claims increased to just over 17 million and that wasn’t what investors wanted to hear either.

While these figures were disappointing and were met with some selling in the stock market, I think the real impact is due to what investors and economists see happening down the line. Many people have been predicting a V-shaped recovery in the economy and that is what has led to the V-shaped rally in the stock market. With some of the economic indicators starting to slow down, it looks like the economic recovery could take longer than anticipated.

Instead of a big jump in GDP in the third quarter, it could be a more modest increase over the second quarter and the bigger increase may take until the fourth quarter or even into 2021. The employment report for July will be released next Friday and analysts are already saying it is one of the most difficult to predict, ever. The June report showed 4.8 million jobs being added during the month and that was a positive surprise that helped spur the market rally and likely helped boost the argument for a strong recovery in the economy.

Another news event from this week was the FOMC meeting and rate decision on Wednesday. The committee left rates alone and that is precisely what was expected by almost everyone. Chairman Powell did say in his press conference that the course of the U.S. economy will be dependent upon our ability to control the pandemic. I’m not sure that outlook was comforting to investors as a great number of states are seeing cases increase at a higher rate.

As I write this, investors are anxiously awaiting earnings results from some of the largest tech companies. Four of the five FAANG stocks are set to report earnings after the closing bell tonight. Facebook, Apple, Amazon, and Google (Alphabet) will all report. I heard one comment on Bloomberg this morning that including those four stocks, approximately one-third of the value of the Nasdaq will report in one huge night for earnings.

This is an incredibly busy week for economic reports and for earnings reports. There is so much information for investors to digest that we may not fully grasp everything until next week. I know I’ve expressed several times in the last few weeks, but I encourage readers to be diligent and to use caution. I’m not suggesting that investors should dump all of their holdings, but I don’t think now is the time to be heavily exposed to the equity market.

With regard to the tech earnings reports, I expect the companies to report solid earnings results because they usually do. My concern for the earnings is that investors have extremely high expectations for the reports and that gives them really high hurdles to clear.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.