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All-time highs, GDP, the Dollar, and murky waters.

By: Devan Robinson

"The only thing new on this earth is the history you don't know." -Harry Truman


All-time highs

The bull charges onward.  The S&P 500 is fighting within striking distance of a new high.  When will it happen? Nobody knows.

Past performance may not be indicative of future results. Indexes are not available for direct investment.

If the S&P 500 hits an all-time high there will be celebration (and deservedly so!).

Keep in mind nearing an all-time high isn't unusual.  After a bear-market or correction the new-high can feel larger than it is.

Investors can often wonder if hitting a new all-time high requires action?  Often the answer is no.  An all-time high isn't an indication you need to do anything; the market is simply confirming businesses are moving in the right direction.

GDP

Market nerds had been eagerly awaiting the official U.S. GDP number for the second quarter. 

What is GDP?   Gross domestic product.  It's a measure of the total economic output of the United States.  You're going to work and doing your job?  That's GDP.  You're spending some money shopping?  GDP.  Buying dinner? GDP.  It's a nation's collective scorecard of the economy.

Economists knew it would be ugly, but how ugly?

We finally got the dreaded GDP number: a contraction of -32.9% real GDP for Q2 2020.

Never thought I'd see a GDP number like that!  Nobody has.  Entire chapters will be dedicated to the 2020 recession in future economics textbooks.  It's nothing short of a stunning number.

But what does -32% mean?  It's bad, but perhaps not as bad as it seems at first glance.  The GDP number is easy to misinterpret.  Keep in mind this is an annualized number.  The U.S. economy didn't shrink by 32%.  The U.S. economy produced ~32% less than the year prior.

Below is GDP over time:

It's a historic contraction but nothing that won't be surmounted by capitalism in time.

On a side-note: stocks yawned the day the -32% GDP number came out.  A picture-perfect example of how stocks are always ahead of the economic numbers.

Big fish get bigger

Apple CEO Tim Cook, President Trump, Microsoft CEO Satya Nadella, and Amazon CEO Jeff Bezos.

It's hard to wrap my mind around the scale of the technology giants.

Per Charlie Bilello:

"At $6.2 trillion, the combined market cap of Apple, Amazon, Microsoft and Google is now greater than the GDP of every country in the world with the exception of the US and China."

  Per Bespoke Research:

"Apple's cash would be the 29th largest company in the S&P 500."

These tech-giants are effectively nation-states and deservedly so.  Apple's Tim Cook and Microsoft's Satya Nadella will go down as two of the all-time great CEO's.

U.S. Dollar weakness and chart-crime

There's a lot of chatter about the decline of the U.S. Dollar.  Below is a chart of the U.S. Dollar against the Euro over the past year:

Past performance may not be indicative of future results. Indexes are not available for direct investment.

It certainly seems like a big decline! 

If we zoom out to see some context the story changes.  Below is a chart looking at the past few decades of the Dollar vs. Euro:

Past performance may not be indicative of future results. Indexes are not available for direct investment.

The Dollar movement of the past few weeks is hardly out of the ordinary.  In fact the move is downright ordinary.

Here in nerd-land we call it chart-crime.  Chart-crime is cherry-picking data.  The nemesis of financial-planners worldwide.  Often accompanied by a fat-commission to the commodity or annuity salesman pitching you.

Doomsday predictions of the dollar crashing come-and-go every year.  Here's a doomsday prediction cheat-sheet: if the dollar is truly crashing you'll know.  You won't have to flip to CNBC or Google for confirmation.  You won't be calling your financial-planner; you'll have other concerns on your mind.

Doomsday investing is a big-business but rarely a good business for investors.

Housing dichotomy

Housing is a wild contrast at the moment.  This is one of those bits of data that might be emblematic of this recession.  The median price of homes sold keeps surging upward:

If you're a homeowner you're benefiting from this trend.  The price of your house has probably appreciated!  It's wonderful news.

For an uncomfortable portion of renters the story is quite different.  Last week the U.S. Census Bureau estimated one-third of American renters are expected to miss their upcoming August rent payment.

This study coincides with the sudden 11th-hour scramble for a second stimulus-package.  A coincidence?  I'd say probably not.  In some of the deep-south states the number is pushing 40%.

Recessions hit everyone differently.

Murky Waters

It feels murky doesn't it?  Things feel all over the place?

The largest-ever hit to U.S. GDP as stocks approach an all-time high?

Small businesses shuttering permanently as big-businesses rival nations?

Home prices rallying as renters struggle to pay rent?

All of these things can be true at the same time.  Waters will be murky for a while and that's okay.  Welcome to recessions.

I had the wonderful privilege of growing up boating on Lake Erie.  Boating is a lot like investing at times.  When boating it's easy to get into trouble because waters are murky.  From your point-of-view the water appears limitless.  Total and absolute freedom to go anywhere.  

That island in the distance?  It's hard not to hit the throttle and charge toward it.

It's a deception.  You can't tell what's lurking beneath the surface between here and there.  Is the water fifty-feet deep or two-feet deep?  Lake Erie is notoriously rocky and shallow.  Where are the rocks lying inches below the surface?  It all looks like deep-water from the boat.

What do you do when venturing into murky waters?  You hit the charts.  

You study the the area you're heading into and where you want to go.  You rely on the collective wisdom and history of the crusty-boaters who came before you.  You learn from their mistakes as much as you can. 

You do your homework, study your history, decide on a route and boat.

Mark Twain once said history doesn't repeat itself, it rhymes.  It's interesting to re-examine headlines from the last recession:

History rhymes onward.

Thanks for reading,

Devan Robinson

The foregoing content reflects the opinions of Fairlead Financial Group LLC and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

 Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past.