GDP: The Good, the Bad and the Ugly

Gross domestic product (GDP) growth in the first quarter was a dismal 0.6%, but there is some optimism for averting a recession, as GDP growth for the second quarter is estimated at 1.2%, according to the Federated Macroeconomic Committee. If this should pan out, it could give stocks a lift, as initially the prediction called for GDP to be breakeven in the second quarter. The positive impact from the government’s $162-billion fiscal stimulus is said to help the economy. The market would be optimistic, as a growth in the second quarter would not mean a recession.

But we see that consumer confidence will remain a challenge for investors, since consumer spending accounts for two-thirds of GDP. The Conference Board reported that consumer confidence in May came in at a weak 50.4, well below the 56.4 estimate, and the lowest reading since a 47.3 reading in February 1992. The concern is the weak consumer confidence will cause consumers to hold back on spending, especially on big-ticket items and housing, and this would negatively impact the economy heading into the second quarter.

The wildcard will be the effectiveness of the Federal Reserve to keep the economy afloat with its massive $162-billion economic stimulus program and efforts to provide liquidity to the economy in order to avert a recession and a collapse in the credit markets. The May consumer confidence report that we discussed in the previous commentary was dismal and could foreshadow additional economic weakness ahead.

For investors, cyclical and small-cap stocks should be carefully analyzed if you are looking to buy. If the economy declines, a slowdown could hurt these two groups more than other stocks.

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Looking ahead, you need to be careful in this market and protect your capital. Market risk remains above average. Be prudent when buying. Access risk capital and trade nothing else. Maintain adequate diversification in regards to market-cap, sector, and geographical exposure. We do not advise overexposure to any one stock, dominant sector, or theme. Taking big risks could wipe out your capital for trading.