DON’T FRET YESTERDAY’S NEWS

This week it was reported that second quarter (Q2) Gross Domestic Product (GDP) fell more than at any time in history, and on the news the stock markets opened significantly lower. Trying to figure out the mind of an investor can be a challenging task. Sometimes I think the investing public has an unlimited capacity for pessimism.
 
Let’s consider a few things regarding this news. The GDP fell to an annual rate of about $19.4 Trillion dollars, about the same as it was in 2017, which was a record breaking year at the time. So the big fall was possible because it was at record highs in the first place. Imagine you’ve gotten straight A’s all through school, then one semester you get a B+. You wouldn’t be very happy about it but given the current crisis, I would take a B+.
 
Not so widely reported was a huge increase in personal savings and disposable income. This is natural since most people are still working, or receiving unemployment benefits, but quarantines and shortages of products like new automobiles prevented them from spending. So Americans are storing up cash. 
 
In simple terms the virus has squeezed the supply side of the economy. We just don’t have as many products available to buy. Movement has also been restricted so people have less opportunity to spend. Finally, uncertainty has caused consumers to delay purchases they would have otherwise made. So it should come as no surprise that the economy has contracted.
 
Now, here is the good news. The GDP report was for Q2 which ended in June. Getting all worked up about it is like being fearful of the storm that came through your town last week. It is old news. The storm may have left some damage in its wake, but investing is all about the future.
 
It is not clear how long the virus will be with us but most of our economy is finding ways to regroup and come back on line. Certainly things are much better now than they were during the worst of it. As an investor I like to look for “potential” in the markets. The personal savings rate in Q2 was a whopping 25.7% compared to 9.5% in Q1.* That is a huge amount of “potential” spending as things open back up.
 
In one of my favorite old auto racing movies a driver breaks the rear-view mirror off his car and tosses it aside saying, “My first rule of driving is, what’s behind me doesn’t matter.” The Q2 GDP report looked in the rear view mirror and told us what we already knew. The current reports of businesses re-opening, consumers building up cash accounts and advances in dealing with the virus all point to what is coming. They show the “potential” that investors should be looking towards.
 
One thing about a really bad quarterly report is it increases the likelihood that the next report, even if not great, may look much better in comparison. That is what I am investing for today.