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Covid Slows U.S. Economic Recovery, Drama on Wall Street - February 1, 2021

The U.S. BEA reported on Thursday that Gross Domestic Product (GDP), which is the largest measure of economic output, expanded at a 4.0% annualized pace in the fourth quarter, down from Q3’s record 33.4% gain.

The graphic below highlights the steep decline in GDP in the first and second quarter and the subsequent rebound. GDP has recovered 76% of its decline through Q4.

Consumer spending makes up almost 70% of U.S. GDP. Outlays by consumers slowed considerably in Q4, as new Covid restrictions late last year took a toll.

Continued strength in residential housing and spending by businesses, however, helped fuel Q4 growth, setting the stage for what could be a good year for economic activity.

Fiscal stimulus is in the pipeline, additional government stimulus is on the table, and a high savings rate seem set to send a flood of cash into the economy this year.

Further, the most recent data from Johns Hopkins shows that new daily Covid cases have slowed, though they remain at a high level. A ramp up in vaccinations could reduce fears, though there are anxieties that virus mutations may present new problems.

One of the things we’ve seen in this crisis has been the resiliency of the U.S. economy. Undoubtedly, fiscal stimulus and low interest rates have helped, but a number of industries have adapted and even thrived in the uncertain environment.

For example, housing was hit hard early last year amid shelter-in-place orders and lockdowns.

But in the second half of 2020, growth soared, despite a surge in Covid cases. That said, industries that depend heavily on personal interactions will probably continue to struggle until the pandemic is under control.

Revenge of the nerds

Last week, a few stocks that had been heavily shorted by hedge funds (shorting is a risky way to profit from the belief a stock will decline in price), soared as young speculators (some described themselves as “degenerates”), used social media chat rooms to fuel purchases and snare professionals in a money-losing trap.

On Wednesday, broad market indexes fell sharply on fears that hedge funds being squeezed might be forced to sell other stocks to raise cash. Volatility continued into Friday.

Fed Chief Jerome Powell was asked about market action at Wednesday’s Fed press conference, which followed the Fed’s first meeting of the year.

Powell declined to comment on specific firms, but opined that fiscal policy and vaccines were responsible for market gains since November, not easy Fed policy, i.e., low interest rates and bond buys.

Low rates and Fed bond buys, economic growth, better-than-expected corporate profits, fiscal stimulus, and the new vaccines have all fueled the rally. Mix in social media, an Internet-driven insurgency, and zero-commission trading, and we saw unexpected volatility last week.

Volatility may occur for any number of reasons, and a market correction can never be ruled out. Still, the economic fundamentals that lifted stocks over the last year remain in place.

“At the end of the day, the stock market reflects economic progress or the lack thereof,” billionaire investor Leon Cooperman said on CNBC. “Water seeks its own level.”

@LWMLLC