Quarterly Market Review (2016Q2): GDP Growth and Equity ReturnsSubmitted by Grunden Financial Advisory, Inc on August 8th, 2016
According to the advance GDP estimate released by the Bureau of Economic Analysis (BEA) on April 28, annualized real US GDP growth was 0.5% in the first quarter of 2016—below the historical average of 3.2%. This might prompt some investors to ask whether below-average quarterly GDP growth has implications for their portfolios.
Market participants continually update their expectations about the future, including expectations about the future state of the economy. The current prices of the stocks and bonds held by investors therefore contain up-to-date information about expected GDP growth and a multitude of other considerations that inform aggregate market expectations. Accordingly, only new information that is not already incorporated in market prices should impact stock and bond returns.
Quarterly GDP estimates are released with a one-month lag and are frequently revised at a later point in time. Initial quarterly GDP estimates were revised for 54 of the 56 quarters from 2002 to 2015.2 Thus, the final estimate for last quarter may end up being higher or lower than 0.5%.
Prices already reflect expected GDP growth prior to the official release of quarterly GDP estimates. As of July 29, 2016, the BEA has already reported a 1.2% increase in the GDP in the third quarter of 2016. This percentage is up 0.7% from the previous quarter. A relevant question for investors is whether a future period of low quarterly GDP growth has information about short-term stock returns going forward.
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