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GDP and Looking Backward

April 29, 2009 – 10:11 am

The first quarter GDP reported today showed us shrinkage of 6.1%, much worse than the 4.5% to 5% expectations. That was close to the 6.3% drop for the fourth quarter last year. Of course the devil is in the details. Much of the decline was caused by the lack of business investment as inventories were strongly reduced and companies shed employees and reduced capacity. However consumer spending increased, rebounding to 2.2% growth and the savings rate rose to 4.2% so the news was not all bad.

This information is interesting and it certainly makes headline news on what has happened in the economy, but for investors it is backward looking. It tells us very little about the future and it is the future in which we invest. The stock market saw these last two quarters coming with a steep fall in prices in 2008 and a sharp further decline in the first two months of this year finally hitting bottom on March 9th. The stock market is forward looking. It has now risen from that March bottom sharply, but lately it has been back and filling, going sideways with a slight upward bias.

The stock market is a leading economic indicator. It is telling us times have hit bottom but since it is still down for the year it is impossible to say the economy is in the clear. It’s not! The market is saying we are in tough times but improving slowly. I will take improving slowly and be happy.

Good Trading
Steve Peasley

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