I was going to add more downside protection today but I’m putting any Put or short ETF buying off for a day or so–until I see how disruptive to the current downward trend tomorrow the first read on third quarter GDP, to be released tomorrow before the market open by the Bureau of Economic Analysis, will be .
The headlines are likely to say something like “Economy grew at a 30% annual rate in the third quarter.”
The headlines will be extremely misleading, but that doesn’t mean that the market, after a few days of selling, might not bounce strongly on the headlines. I’m going to wait and see.
It’s important to remember how the Bureau of Economic Analysis calculates an annualized growth rate for the economy each quarter. The statisticians take the sequential change–in this case the change in GDP from the horrible second quarter to the much improved third quarter–and then annualizes it.
The result is to magnify short term changes. So, for example, for the June second quarter, GDP fell 9.1% from the first quarter. That was a terrible number–the worst quarter to quarter decline since the government began keeping GDP records in 1948.
But the BEA annualized that decline to report that the economy shrank at a 31.7% annual rate.
How did they get that number? By multiplying the change in the second quarter by four. The assumption, ridiculous in the current pandemic economy, is that the next three quarters would follow the trend in the second quarter.
Which, of course, didn’t happen, as the economy rebounded in the third quarter as many states loosened the shutdowns that had crushed their economies in an effort to slow the spread of the coronavirus.
The headlines tomorrow will show the same nonsense as the government statisticians multiply the rebound in the third quarter from the second quarter by four to generate an annualized growth rate for the U.S. economy.
Just, of course, as the economy is showing signs of a significant slowdown as the coronavirus surges again.
This shouldn’t move stocks tomorrow. Everyone on Wall Street–and many individual investors–know that the headline annualized growth rate to be reported tomorrow is deeply deceptive.
But after a few days of selling and the heavy selling in the market today with the Standard & Poor’s 500 down 2.47% as of noon New York time and the NASDAQ Composite off 2.82% I’m sure some traders will try to get stocks to bounce on the headlines.
I don’t have the foggiest idea whether or not they’ll succeed, but I don’t want to get caught adding downside plays if the market should bounce on the headlines. I’ll wait until Friday and see what there is to be seen.
If the market were to behave consistently, of course, everyone would ignore tomorrow’s numbers. They are old news. The third quarter is done and priced in. In the last couple of months the market has ignored a lot of good and bad news on the theory that since it reflected past economic performance, it didn’t say anything significant about the future.
The market could say that about tomorrow’s GDP figures too. But I’m not counting on the market to be consistent.
