How bad is the second quarter going to be? This is a question which many are pondering.
It is ironic to see the market remain near all time highs while people are debating how big a drop we see YoY. GDP is going to plummet.
GDPNow is put out by the Atlanta Fed. It is not the official forecast by the bank but, rather, an estimate of what could take place.
How does the indicator look at this point.
As we can see, the indicator got a bit more positive over the last few weeks, moving up for a drop of 55% to where it stands now, just over 45%. This means the expectation is that GDP in quarter 2 will be 45% lower than it was a year ago.
Will we see the market take the "not as bad as expected" approach? Markets are all about expectations and when they market is surprised on the upside, no matter how bad the news, things tend to run up.
There is little doubt that the 2nd quarter is going to be awful. Much of the country was closed for two months of the quarter while a lot of areas are still closed. Coupled with this is the fact that a number of industries are going to see their numbers off for a number of years, and we can see how dire the situation is.
This week, there were still more than 1 million people who filed for unemployment. Congress is starting to talk about another stimulus package to try and keep things afloat. All the while, Europe is looking worse with each passing week.
At this point, anything below a 50% drop in GDP will likely be looked at as good news. The response to COVID-19 basically shut down 2/3 the global economy. Companies that are doing business in Europe are going to see worse numbers since they are still mostly closed down.
The bulls keep presenting an optimistic case. There are some, including the Administration, who are touting a V-shaped recovery. This is something that I find highly unlikely. In fact, there are a number of industries that they are hanging their hat upon yet tend to be lagging indicators. Real estate is a major one and we likely will not know how things are faring there for another year or so.
All this is leading many to speculate that this is the "bubble of bubbles". The market is basically acting like COVID-18 never happened and that companies are not in horrible shape. We see a lot of industries that are in very rough shape. Those that were hurting before the shut down are now teetering on the brink of bankruptcy.
As of today, GDPNow is not very optimistic. We will see how accurate it turns out to be.
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