Well, the markets certainly had some "bad news is good news" trading action on Thursday. The S&P 500 was up 2% and the Nasdaq traded 2.7% higher despite a rather horrid initial cut of first quarter GDP. Economic activity rose only 1.1% in the first quarter, compared to the 2.0% consensus, and 2.6% real GDP level in the fourth quarter of 2022. A shout out to Barclays for being the closest to the preliminary first-quarter GDP reading.
Not only was economic growth far lower than the consensus, but the Core PCE deflater rose to 4.9%, higher than the fourth quarter and significantly above expectations. While it is true that most of the GDP miss was due to falling inventories, government spending and personal consumption also accounted for all of the tepid GDP gains the first quarter produced.
Solid first-quarter earnings from the likes of Meta Platforms (META) and the continued faith the Fed is close to a "pivot," powered the rally in trading on Thursday. Right now, the market is anticipating a final quarter-point hike from the Federal Reserve during their upcoming May meeting. However, the consensus has the oracles of the central bank then cutting 50 basis points before the end of this year with more cuts to follow in 2024.
Growth clearly slowed after the second and third largest bank failures in U.S. history in early March. The stress on the regional banking system means increasingly strident conditions for loaning to many sectors of the economy, particularly small businesses. This will put even more pressure on the beleaguered commercial real estate space which is seeing declining asset values and a huge amount of debt that needs to roll over in the next few years.
To me it is eerie how this era seems more and more like the 1970s Redux. We have high inflation, a divided electorate and inept political leadership. Back in the early '70s we were involved in a proxy war in Vietnam, currently the nation is involved in another one with the only thing lacking in boots on the ground. Even the Knicks are good again.
Billionaire investor Stanley Druckenmiller chimed in this week saying he was "unnerved" by the Fed's response to the implosion of Silicon Valley (SIVB) and Signature Banks (SBNY) . He sees a hard landing on the horizon and is short the dollar. I agree with him on the latter and to me the only question is how deep/long the coming recession will be, not whether the economy is heading directly into one.
In addition, he believes there is a good chance that equities will trade sideways for the next decade, albeit with significant swings in volatility. I am not quite ready to embrace a "lost decade" in stocks, however, if we do get an era of Stagflation like last seen in the '70s, an investor must remember that the Dow went nowhere from 1966 to 1982. Stocks were largely not the place to invest, but to trade, while other assets (Ex, Gold, Commodities) provided the place to pitch camp.
If the environment Druckenmiller foresees for the market comes to pass, investors are going to need to learn some new tricks to navigate what will be a very challenging market. In my next column, I will outline my own Druckenmiller investing game plan.