Case Study: Economic Fundamentals and Mid-Recovery Slowdowns
The U.S. is amid a historic recovery, with U.S. GDP expanding at an eyewatering 4.3% (Q/Q SAAR) in Q4 2020 and 6.4% (advance number) in Q1 2021. While the loosening of COVID-19 restrictions, substantial fiscal stimulus, and loose monetary policy have contributed to a substantially sunnier economic outlook than the doldrums of 2020, the U.S. also faces significant headwinds. The labor market is at perilous lows, the external environment is challenging, and commodity prices are spiking. Recent economic data, moreover, have cast a dark cloud over the rate of future economic growth, with payroll data disappointing substantially in April 2021.
Should this trend continue it is reasonable to ask if the best days of the economic recovery are already behind us. We believe that the choice between stocks and bonds is the most important decision an investor can make, and that economic fundamentals provide a powerful signal in aiding this choice. Using the recovery from 2008-2011 as an example, we believe there were benefits to using economic data to capture slowdowns and double dip recessions in nascent economic recoveries. Astor used the economic data to inform its allocation decisions in its strategies during that time period.
In 2010, the U.S. economy came roaring out of the gates following the 2008 financial crisis, with Q4 2009 GDP posting a gain of 4.5%, and gains consistently high throughout the following 4 quarters.
Equity markets responded in kind, with the S&P 500 up nearly 40% from the beginning of 2009 through the end of 2010.
All was not well, however, with the U.S. economy. The immediate years following the trough of an economic recovery are fraught with perils, with already weak economic fundamentals vulnerable to exogenous shocks. 2011 was such a time in the United States, with lower consumer and government spending coupled with negative spillovers from Europe and commodity prices leading the U.S. into a contraction in two quarters of the year. As a result, jobless claims and the ISM Purchasing Manager Index, two of the data points Astor looks at closely, showed a slowing economy.
We believe the weakening economic data and a worsening fundamental outlook were the main reasons why equity markets experienced a large drawdown and substantial volatility throughout 2011.
Although the story of 2021 is not yet written, we are confident that we have the framework and expertise to identify economic slowdowns (or indeed, expansions) as they happen. We will be keeping our eyes closely on the data and will adjust risk in our portfolios accordingly.
We believe economic data will be instrumental in the direction of stocks throughout 2021 and into 2022. Unlike many asset management firms, Astor believes in making our research available to investors.
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