Tuesday, December 22, 2009

Q3 GDP Revised Lower Again - But No One Cares

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis." 

I continue to be amazed by the market's non-reaction to these revisions.  Initial Q3 GDP was expected to be around +3.2%.  When it was reported at 3.5% on October 29th, it set off a 70 point rally in the S&P 500 - from 1040 to 1110.  Yeah! Our economic rebound is taking hold!  Things are getting better!  Green shoots!  (imagine those last few quips were written in sarcasm font).  On November 24th, the first revision to the report came out, "in line with consensus estimates"  at +2.8%, and stocks didn't care.  Somehow, the consensus estimates had managed to be lowered to 2.8% without anyone noticing or repricing the market to account for the downward revisions in estimates.

Today, the GDP growth rate was further slashed to +2.2% - but again, stocks don't seem to care, as futures are still above fair value, indicating a higher open for the market!

What would have happened if the initial GDP report came in a 2.2% instead of 3.5%?  I'd have to think the effects on the stock market would have been dire - as it would have showed that our "strong rebound" wasn't so strong after all.   Somehow though, nearly two months later, the market is content to ignore the actual data, having happily digested the incorrect preliminary data.  Said differently, by initially reporting the Q3 GDP growth rate at +3.5% instead of +2.2%, the growth rate was overstated by nearly sixty percent!

My point is simply this: when markets reprice based on data beating expectations, it would seem reasonable to expect them to reprice (lower this time) again when that same data turns out to have not beat expectations.
Odd indeed - it tells me that this market continues to act irrationally. 



BigShow said...

It was only a matter of time! A effing tip jar. Sellout.

maynardGkeynes said...

Perhaps the market is saying that this makes it more likely that the FED will keep interest rates low for a longer period. Given the impact of ZIRP on bubbling up asset prices, the reaction to this "negative" news doesn't surprise me anymore. Then the issue, as you say, is why does the market pop when the news is "positive," which makes it more likely that the Fed will have to raise rates sooner than otherwise. It could be that the implications for higher earnings, which are positive for stocks, outweigh the negative implications posed by rate hikes. The difficulty is quantifying in some sense the relative magnitude in either direction, positive or negative, of any particular piece of news. You could say the reaction is "irrational" only after you have done this. Otherwise, you'd have to assume that that is exactly what the market is doing, behind the curtain so to speak, and that it is not irrational at all. Isn't that kind of calculation what markets do better than our puny human brains?

Kid Dynamite said...

the ads were WAY more of a sellout than the tip jar! but they shut me down on that front!

Kid Dynamite said...

@maynardGkeynes - absolutely. but as you say - if we're going to use the "bad data is good because it means longer duration of ZIRP" argument, then you have to use that same argument on the initial GDP print of 3.5%!

i think that the spin machine has won the game - and that people just don't care about the revisions.

Anonymous said...

Two points:

1. If the last quarter gets revised down, that leaves more points to pad onto the upcoming quarter's number. Green shoots, baby!

2. Is there anyone still buying stocks for the
long term, or is it only day traders and GS
now? I'd guess we lean more towards the
later, which means the stock market has
nothing to do with's just the
trading tide, going in and out.

Anonymous said...

While I'm not a professional trader, most of what I've read states that the public hasn't returned to stocks in any degree. Rather it's mostly the high frequency trading and other well monied entities that now support the markets rise. That sounds plausible to me. Thus, this amping up the market over virtually any excuse seems par for the course ... for these times.

Certainly I'm not buying stocks. Not even tempted. But then, the stock market appears to have found a life beyond the individual investor. Whooooo... zombies are scary stuff. Who's to say how long they can carry on. We're in uncharted territory.

GS751 said...

I wonder how much of the 3.5 Number could have been a publicity stunt I haven't looked enough at the releases to know though. Will be interesting to compare the Q3 Revisions with the Q4 ones.