Those of you who have read my book know that I like to view market activity through multiple perspectives. Most of my previous charts begin at year ended 2002, which in my opinion provides the truest economic view because it begins at the approximate date of the last recessionary bottom. And because I don’t believe we’ve hit rock bottom in this corrective cycle, I believe that to be the best point at which to start.
However, if you’ve been reading my blogs you know the difference between Real and Nominal GDP is inflation. Reported by the government, Real GDP is determined by using a prior year’s dollar to value economic activity. Currently the government uses 2005 dollars to determine Real GDP. For this reason we can use 2005 as an alternative starting point. Here’s that view.
This chart isn’t much different from the prior ones: inflation is easy to see and investor skepticism is just as apparent.
However, on this chart the Dow broke below Real GDP on August 10, 2011 (when it was at 10,720) which indicates recession. That’s why you hear pundits say that recession is already “priced into the market.”
I hate it when they say stuff like that.
Clearly investors are indicating recession (because the Dow is trading below GDP) but to say the stock market won’t sell-off when the government finally releases recession data is just crazy. That’s what happens. That’s what they do. How could it be “priced in” then?
My advice: don’t worry about pricing negative stimuli into “the market.” Instead keep your eyes on Market fundamentals. Market conditions are negative, inflation makes recessions worse, and both are on the horizon. Europe is in real trouble and revolution is in the air all across the globe.
So on a day when the DJIA struggled to breakeven, gold set another record (now at $1,898 and ounce.) It all makes perfect sense.