Here’s Why a Decline in GDP Doesn’t Matter One Bit

The details weren't bad, and the data was old, so investors should look ahead

   

Here’s Why a Decline in GDP Doesn’t Matter One Bit

Today investors were greeted with some gloomy GDP news, with the U.S. economy shrinking in Q1 at a 1% annual rate. That’s down from a 0.1% expansion previously predicted, and the first decline in the economy since 2011.

The stock market, however, didn’t really miss a beat. The major indices opened higher and continued to show strength across the day.

So, what gives?

Well, for starters, the details weren’t actually all that bad. For instance, consumer spending rose 3.1%, slightly more than the 3% first forecast.

Furthermore, a lot of folks already expected a downward revision thanks to that bad winter weather that continues to be a scapegoat.

But the bigger narrative here might simply be that GDP numbers don’t matter that much.

Charles Sizemore, editor of Macro Trend Investor, says the most important thing to remember is that while the market is forward-looking, GDP is always a backward-looking indicator. After all, this is Q1 data — and Q1 ended on March 31, almost two full months ago. 

Furthermore, Sizemore says, the problems outlined in this GDP report — including a crash in construction and disappointing inventory growth — were pretty much predicted while the U.S. was being hit by bad weather, and certainly talked about at length in the following months. If anything, Q1 GDP data simply validates previous assumptions instead of changing the game.

So what should investors pay attention to?

Sizemore says the most important thing to do right now is to look at fundamentals and valuations on an individual basis instead of hoping for some big-picture metric. The bottom line is that the stock market as a whole could be moving sideways, so finding the best stocks in a ho-hum market is key.

That involves looking at midcaps and small-caps, international stocks and beaten down sectors where you could find stocks trading for good valuations despite a rather stretched market without much earnings or economic growth.

Check out the associated video for more details about how to trade the first-quarter GDP news.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP


Article printed from InvestorPlace Media, http://investorplace.com/2014/05/q1-gdp-decline-investors/.

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