3rd Quarter GDP Growth
Tuesday, November 1, 2022
What a Rebound
After two consecutive quarters of negative growth, the U.S. economy grew at a 2.6% annualized rate in the third quarter, driven by a resilient consumer sector. Real personal spending - roughly 70% of the economy - grew 1.4% annualized, slightly slower than the previous quarter.
A strong labor market and a stockpile of savings have supported consumer spending so far this year and growth in Q3. Eventually, consumers could retrench as they draw down savings and tap into credit or pull back on spending.
Not surprising, residential investment subtracted from growth as borrowing costs spiked and housing demand plummeted. Outside of the pandemic, residential investment contracted the most since 2010. As housing normalizes in the coming quarters, this category will continue to be a drag on growth.
Here Comes The Next Best 6 Months - Historically
On the positive side, from a seasonality perspective, we’ve reached what has historically been a turning point. Looking at the first few quarters of a midterm year of the Presidential cycle, we find that stocks usually don’t do well averaging a 17% pullback at some point prior to mid-terms. We have certainly seen that trend continue this year. The good news is Q4 post midterm election and the next two quarters have typically shown to be the strongest out of the entire four-year Presidential cycle.
Many investors have heard “Sell in May and Go Away,” which represents that historically, the worst six months of the year for stocks are from May through the end of October. The good news is we are about to leave those worst six months and enter into what has historically been some of the best times for stocks. In fact, November through April shows us that stocks have been higher every single time during a mid-term election year going back to 1950. That is 18 for 18. We are seeing many opportunistic signs that a major market low could be taking place.
Consumers will be the linchpin for the likelihood of a soft or hard landing after the Fed makes more rate hikes in November and December. The Federal Reserve is likely to make another 0.75% increase in the near-term.
There are a number of opportunities and risks to weigh. A deteriorating housing market, nagging inflation and an aggressive Federal Reserve will increase economic risks. From a technical standpoint, a silver lining is markets may have priced in much of the near-term recession risks.
Our Covenant Wealth Strategies' Investment Team is closely monitoring a variety of signals and indicators to make wise and appropriate investment decisions. While we anticipate near-term market volatility, there is a chance that the markets could rally into the end of the year.
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