It appears markets have returned to taking binary bets on economic data this week after first quarter US GDP softened. The US economy’s annualised growth slowed down to 1.1% in the first three months of the year versus consensus expectations of around 2%.
Somewhat perversely, this had a positive impact on markets. One would, in normal times, expect a weaker US economy to be bad for markets as it implies consumer spending is lower and heightens the risk of recession.
This time around, however, there is a bigger problem: inflation. Interest rates have risen significantly in the past year with central banks aiming to curb higher prices.
As such, a weaker economy may lead the Federal Reserve to pause interest rates to allow for growth, something that would be much cheered by the market. This was very much the situation in the bull run that followed the financial crisis: bad economic news was good market news.
Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, said: “Even though consumer spending continues to be relatively resilient, the pace of growth looks rather uninspiring and it’s clear that the Fed tightening cycle is now biting.”
At the time of writing, the S&P 500 index was up 1.3% on the news, but some experts were quick to point out that the data was a lot more nuanced than they may appear.
Matt Peron, director of research at Janus Henderson, said both demand and inflation were quite strong despite the headline weakness, while Premier Miton chief investment officer Neil Birrell said “investors could read pretty much anything into these latest figures”.
Trading off economic data is unlikely to be a fruitful exercise. Even when getting big macroeconomic calls right, the answer can surprise.
For example, when former US president Donald Trump was elected, it was expected that markets would tank as the political novice would struggle to inspire confidence. In reality, the opposite was true, with the market hitting new highs.
In the wake of Covid, many expected the market falls of March 2020 to continue throughout the year, but markets soon recovered and investors would have had to be spot on with their timing to make the best returns.
Today, the focus is squarely on central banks and whether they will raise interest rates or not. Higher rates threaten to derail both the economy and the era of cheap money and low yields that have inflated stock market valuations and kept poor businesses afloat.
Yet with high inflation threatening recessions across the world and a cost-of-living crisis leaving many unable or barely able to afford their living expenses, the decision to raise or not is much tougher than three months’ worth of slightly worse-than-expected data.
It is for this reason that Trustnet asked Nathan Sweeney this week to build a ‘perfect portfolio’ for the long term, ignoring the short-term noise and focusing on the next several years.
It’s how I personally put my money to work, because I am not smart enough to call the outcome of macro events and even less equipped to know where to invest for their ramifications.