MorningWord 5/19/15: Q2 GDP’s Headwinds

by Dan May 19, 2015 9:31 am • Commentary

If Q1 GDP is revised lower from its reported 0.2 gain (well below the prior quarter’s 2.2% gain) it will mark the third negative Q1 print since 2011.  Cold rain and snow apparently wreaked havoc on economic activity in the U.S. during the winter months, but economists have not seemed too bothered, taking comfort in the notion that Americans eventually emerge from hibernation when the weather gets better.

But if we were to get a negative Q2 print this quarter (the opposite of the large snap-back we saw in Q2 2014) indicating in a recession, would it be followed by an asterisk in the form of a snowflake?

Across the pond, the ECB isn’t helping to disavow the stereotype that Europeans (particularly bond traders) are lazy summer vacationers. They’ve announced that they will be “frontloading QE in May and June” so that they program doesn’t run in to trouble with low liquidity when everyone is on vacation later this Summer.  In a speech this morning, ECB executive board member Benoit Coeure laid out intentions to “increase its purchases of euro-area assets in May and June ahead of an expected low-liquidity period in the summer”, per Bloomberg:

We are also aware of seasonal patterns in fixed-income market activity with the traditional holiday period from mid-July to August characterized by notably lower market liquidity

If need be, the front-loading may be complemented by some backloading in September when market liquidity is expected to improve again. The slightly higher purchase volume that market analysts may observe in the coming weeks is therefore unrelated to the recent episode of market volatility

That got a rally going in Euro stocks, Euro bond yields are dropping and the currency is getting smashed.

For those who though they were investing in the “public” markets in a period that resembles the norm, think again. It seems like every morning we wake up to a different headline desensitizing us to our never ending crisis monetary policies.

What’s interesting to me is that the news in Europe caused a sharply higher dollar. And that should make for more headwinds to U.S. corporate profits. On our home-front, dramatically better than expected housing starts has the TLT at 7 month lows in the pre-market.

The bottom line in all of this is will the recent stabilization in commodity prices and rising rates in a market that is betting on rate increase (for the first time in nine years) combined with a resilient dollar produce a negative Q2 print?

Why do recessions matter for stocks? Well, generally stocks don’t act well during recessions as they discount the potential for lower profits in the face of weakening demand.  Doug Short (of detailed the performance of the S&P 500, from its prior highs, during the 9 recessions since the index’s inception in 1957 in a blog post back in October (here):

Since the inception of the S&P 500 in 1957, there have been 9 recessions and 9 bear markets (20% or greater declines).  However, three bears were not associated with recessions, and three recessions happened without a bear market, although the 1990-1991 recession had the ultimate “near” bear with its 19.9%.


Stocks go down during recessions, but in many instances they bottom before the recession is over. So far stocks don’t act like we’re having two consecutive GDP declines.