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Translating GDP Declines into Investment Advice

All over the web we see economic indicators reaching new highs and lows, but investors often confuse economic information with investment information. There is a major disconnect between the economy and the stock market and its easy to see with FastTrack charts.

Ignorance has no bounds . . . the story in 5-years will be the same with the economy up or down

Check out the FastTrack charts below and see that despite the negative economic news, the investment environment over the last 5-years far rosier than the numbers suggest.

In this post we’ll use an article in today’s WSJ as a baseline “economic report” and break it down sector by sector. June 25, 2014 article for THE Wall Street Journal by Jonathan House.

Health Care

Looking at healthcare, the article notes “…consumer spending growth was lowered to 1% from 3.1% previously, largely because health-care spending was weaker than previously estimated.

VGHCX vs SPY

VGHCX vs SPY

The green line is VGHCX, the Vanguard Health Fund and the red line is the S&P 500. “Weaker healthcare spending” surely didn’t equate to lower health care returns. VGHCX posted a 8.85% return in the first quarter of 2014. We saw a pull back after the first quarter GDP figures were released, but the March drop didn’t come close to wiping out the overall first quarter gains.

For the last 25-years while the economy has been on a roller coaster, VGHCX has risen even faster than the broad US Market (SPY S&P-500 exchange traded fund is the red line in the chart above), and the ride is not over.

 Construction

SPY vs FSHOX

SPY vs FSHOX

From the article, “We see a 6.5% fall in housing starts and a 4.2% fall in spending.” This is in tune with FSHOX, the Fidelity Select Construction and Housing fund (shown in green). FSHOX foundered in the second quarter… but more importantly, why worry about it when there are so many other bright segments of the economy (like Health above).

Commerce

  • “Commerce had previously estimated output fell by 1% in the first quarter…”
  • “Exports also declined…“
  • “Economists surveyed predicted Wednesday’s report would revise GDP growth down to a 2% decline.”
  • “Six month growth is below the 2% average since 2009 and below the U.S. economy’s longer-term growth rate of over 3%.”

“It does not sound like the economy has reached escape velocity no matter how you try to spin it,” said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. “It’s going to take some big numbers the rest of 2014 for the economy to hit 2% growth.”

SPY vs 3%

SPY vs 3%

Reading just the article, it sounds like everything has been crummy since 2009. Yet, this is a period in which the red SPY (broad market) has risen 24% annually. I am not sure how to measure the cited “escape velocity”, but this looks good to me..

The article mentions 3% growth so we put in a 3% green line(annualized return). What is clear is that GDP growth has little to do with the ability of US companies to change, belt-tighten, and grow profits despite the economy. If you had money in a mayonnaise jar buried in the backyard, you missed one of the greatest rallies in history.

Corporate Profits

The article cites “five years into the recovery . . . Corporate profits after tax, without inventory valuation and capital consumption adjustments, rose [a paltry] 0.1%

2009 Dividend Payout

2009 Dividend Payout

2014 Dividend Payout

2014 Dividend Payout

In 2009 (upper chart), the 500 biggest companies in the US held by the SPY fund paid out 2.44% in dividends (a share of the profits). This was at the pit of the recession discussed in the article. Note in 2013-2014, these same companies paid out 2.30% in dividends, of course, this is misleading. Since the SPY fund has gained 139% over the five year span of 2009-2014, the actual cash paid in 2014 was more than twice the amount paid in 2009.

What’s the Punch Line?

If you’re investing, the right information is critical. There’s tons of noise on the web, but simple charts and quality data are a great way to get organized and understand the real market story.

FastTrack training and daily charts have all the information an investors needs to become wealthy. The economy performed poorly over the last 5-years, but news reports of older employees having to postpone their retirement is only true of those who were unaware of the stock market reality.

Ignorance has no bounds . . . the story in 5-years will be the same with the economy up or down.

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