Stock Market’s Good News – GDP Growth Better Than Reported

The GDP news reports say, “Recession, maybe.” However, the actual news is, “Growth!” Why the difference? Over-reliance on the “real” (inflation-adjusted) calculation. That latter number is misleading to stock market investors. Here are the problems:

First, stocks are valued on current dollar results and expectations. If a company’s sales rise by 10% with one-half being due to price rises, that’s a sign of strength – a measure of “pricing power.” Following, the company’s earnings growth shows its ability to control costs, particularly resource pricing. The acid test is whether a company can maintain its profit margin – the percentage of sales that flows to earnings.

Second, the recent price index calculations have overstated “fiat inflation” – i.e., the U.S. dollar’s loss of purchasing power through increased currency (money supply). Included in the overall number currently are price increases from Covid recoveries (e.g., airline fares) and supply constraints (e.g., vehicle prices). Moreover, these short-term increases are beginning to stabilize and even reverse.

Third, the Federal Reserve’s abnormally low interest rate policy dampens economic growth – rising rates now are boosting it. That effect is visible by examining the tepid GDP growth during the two Greenspan low-rate experiments and, especially, the overlong Bernanke-Yellen-Powell experiment. Why? Those economists focused on borrowers, not on investors – the multiple $trillions held by millions of individuals and thousands of organizations that depend on interest income. Without it, their spending is reduced. Moreover, the economists also overrode capitalism’s key strength – the allocation of capital assets based on market pricing. Without it, capital flows to weaker uses, particularly financial gamesmanship and enrichment (i.e., non-economic growth).

This long-term, four-quarter GDP growth graph shows the results. The latest (through June) was 10.1%.

The bottom line – The economy is looking good

And that means the stock market is attractive. Will there be a growth slowdown as interest rates rise further? Not from a stock investor’s standpoint. Expect sales and earnings to rise. Moreover, financial “cleverness” based on cheap money will diminish, with over-leveraged funds losing their reason for being.