U.S. GDP growth slowed in the fourth quarter, gaining just 1% from the third quarter. For the full year the U.S. economy contracted by 3.5%. That makes 2020 the first time that the economy has contracted for a full year since 2009 and the Great Recession. At the bottom of that recession that economy contracted by 2.5%. 2020 is also the worst year for economic growth since 1946 when the economy shrank by 11.6% as the country demobilized after World War II.
Consumer spending slowed in all 15 categories tracked by the Bureau of Economic Analysis. The sectors that had powered the recovery in the third quarter–restaurants and hotels, for instance–reversed. The growth in spending on cars and health car also slowed from the acceleration in the third quarter.
So why is this good news as far as the stock market is concerned? Today, January 28, the Standard & Poor’s 500 climbed 0.98% at the close and the Dow Jones Industrial Average gained 0.99%. The NASDAQ Composite was ahead just 0.50% and the NASDAQ 100 added 0.68%. The small cap Russell 2000 index lost 0.08%. The iShares MSCI Emerging Markets ETF (EEM) picked up 0.72%.
First, because it’s old news and Wall Street is looking ahead, as always, to a better economy in 2021 with the coronavirus in retreat (the hope) and more of the economy back to business as usual (the wish).
Second, because an economic slowdown raises the odds that something like President Joe Biden’s $1.9 trillion coronavirus stimulus/relief package will pass Congress. The economy has been staging a terribly uneven recovery with the the unemployment rate for workers who can work from home just 3.9% but 8.5% for workers who have to report to a job site, a restaurant, for example.
And there’s strong evidence in the numbers that the $1,200 checks in the first coronavirus package were essential in halting the economy’s downward spiral. Personal income grew in 2020 because of those $1,200 checks and the slowdown in the fourth quarter came as Congress refused to pass an new package with another round of checks until the last moment in December. This time the checks are for $600 and that argues that by March the effect of those checks, plus the renewal of extended and enhanced unemployment benefits (which expire in March), will have dissipated and unless Congress passes new package the economy will slow again. The positive effects of the coronavirus vaccine on the economy aren’t expected to show up until, optimistically, late in second quarter, and, more likely, not until the third quarter.
As you might expect, given this interpretation of the GDP report, shares of companies that would benefit from a strong economic recovery in the second half of 2021 climbed strongly today. Disney (DIS) finished up 5.39% on the day, MGM Resorts International (MGM) closed up 4.20%. Shares of commodities companies, which would provide the raw materials for an economic recovery, were also up big. Southern Copper (SCCO) added 2.52%, First Quantum Minerals (FQVLF) was higher by 8.94%. And Freeport McMoRan Copper and Gold (FCX) gained 7.75%.
Gold and silver miners also gained. Barrick Gold (GOLD), for example, was up 1.46% and the VanEck Vectors Gold Miners ETF (GDX) rose 2.58%. First Majestic Silver (AG) outpaced gold stocks with a gain of 21.38%. To me that suggests the move up in precious metals is something of a bet on higher inflation (with stronger economic activity) but more so a bet on stronger economic activity itself. (Silver has more uses in the real economy than gold and that metal tends to be more sensitive to economic growth.)
There’s also been recommendations on the Reddit board that drove the GameStop surge to short silver. More on that in a post later tonight.