Negative Economic Growth in Q1 2022
What Might This Mean for My Investments?
On Thursday, April 28th we received the news about the growth of the economy in the first calendar quarter of the year. Gross Domestic Product (GDP), which measures the output of the U.S. economy, unexpectedly declined at an annualized rate of 1.4%. This came as a surprise to many market participants, as the consensus expectation was for growth of approximately 1.1%. Compared with the 6.9% gain in economic output in Q4 2021, and one might be concerned that this could cause market disruption.
Perhaps surprisingly, markets paid little attention, as both stocks and bond rates rallied at the market open. We have received calls from a few concerned clients that thought this could be the beginning of a recession (a recession is defined as two consecutive calendar quarters of negative GDP growth.) Should this report cause concern for investors? Does this mean it’s time to become more defensive?
As is usually the case, there is more to the story than the headline.
It is said in the world of economics that one number does not a trend make. We think that may well be the case here. As mentioned earlier, when we entered 2022 the economy was moving ahead nicely. The 6.9% growth rate for the last quarter of 2021 was more than double the 3.4% average rate from 1948 – 2022. So, it is important to understand that this most recent report is no more a prophecy for the coming months than the Q4 2021 report was for this year.
Underneath the headline, we see that some of the contributors to the downturn in activity are in areas that could rebound as we move further through 2022. For example, at the beginning of the year, inventory levels were rather high. As production eased to allow for the working through of those inventories, activity in certain manufacturing areas decreased. An 8.5% decrease in defense spending for the quarter also put a particular drag on activity. Other factors included a reduction in exports, and federal spending in general.
So, while this number might feel like a bit of a slap in the face, it does not necessarily mean that a recession is nigh.
We think that while we are experiencing a secular change in the direction of interest rates, asset prices across the board are going through a re-pricing phase. With the U.S. Fed engaging in a series of hikes to the Central Bank lending rate and beginning a tapering of their bond buying activities, investors are re-assessing prospects and adjusting portfolios accordingly. We at Atlas are doing the same. But we expect to experience heightened volatility in both the stock and bond markets for the next several months before a foundation is established to support the next phase of forward movement in the markets. As always, we think that the question regarding the next market rally is not one of “if,” but rather “when.” That’s difficult to say, but as they do say, “It’s not about timing the market, it’s about time in the market.”
So, as always, we advise our clients to not allow headlines to change your investment risk tolerance or take your focus off your longer-term objectives. Timing markets has never shown itself to be a worthwhile investment approach over any sustained period. Instead, as research has shown, maintaining one’s proper risk-based asset allocation and rebalancing with forethought has shown itself to be a prudent investment strategy, regardless of interim market volatility.