Economic Crystal Ball Forecast: Cloudy With a Chance of Sunny Investment Opportunities

Cloudy With a Chance of Sunny Investment

Most of us know that trends in the nation’s Gross Domestic Product (GDP) have a great deal to do with our personal well-being. When GDP sank at the end of 2007, it presaged hard times to come. Now that GDP has slowed significantly since the post-pandemic surge, many observers believe a recession is on the way, or already here.

GDP measures the total value of all final goods and services produced within national borders. The figure is important to investors because it is a key barometer of national economic health, and can aid in forecasting future economic activity, as well as corporate earnings.

It is also often a good indicator of whether interest rates may be headed up or down. A weak GDP number makes it more likely that the U.S. Federal Reserve will keep interest rates low. When the economy overheats and inflation gathers momentum, interest rates are essentially the Fed’s only tool for the task of slowing economic growth and restraining prices.

Quarterly GDP reports issued by the U.S. Department of Commerce are based on calculations of personal consumption and spending, investments, exports and government sector activity.

Until 1991, the federal government used a different economic yardstick known as Gross National Product (GNP), which measures goods and services produced by American companies, whether in the U.S. or worldwide. Rising national debt and greater foreign ownership of assets will depress GNP, but not GDP. Of course, huge increases in both debt and foreign ownership of U.S. businesses have occurred since 1991.

Some economists believe there is too much focus on the GDP number. For example, several studies of U.S. and global stock markets have failed to show a correlation between GDP growth and stock market returns. But there is one intangible variable that often accounts for this difference: the savvy investor.

Whether that savvy investor is an asset management company such as Toronto-based Anson Funds, a portfolio manager of a large mutual fund, a high-end individual investor or the ordinary retail stock market player, agile investors don’t keep their strategies static in the face of an economic downturn. Hedge funds in particular are able to turn a slowdown in economic growth, a slump in equities or a disappointment in corporate earnings to the advantage of their investors by adjusting investment choices.

As the North American economy began a glide toward slower growth in 2022, for example, Anson Funds had one of its most rewarding years, in part because it anticipated earnings weakness for a key player in the electric vehicle sector, and reacted accordingly. Its well-timed bets resulted in significant returns, even as U.S. GDP grew by just 2.1 percent.

On the macro level, smart investors look at an array of other key economic indicators, beyond the GDP numbers. Many pore over the minutes of the Federal Reserve’s Open Market Committee minutes, looking for clues to the magnitude and frequency of future interest rates changes. Some also track the Federal Reserve Bank of Philadelphia’s quarterly Survey of Professional Forecasters for additional insight into the mind of the Fed.

Data and pronouncements from the National Bureau of Economic Research are also closely watched. A cautious group of academics, they are seen as the arbiter of when recessions start and end. The Bureau uses a broad measure to define a recession; not simply two quarters of decline in GDP, but also weakness in income, employment, production and sales.

The Wall Street Journal Economic Forecasting Survey is another popular resource for investors. It’s a monthly poll of more than 50 economists who make predictions on major economic indicators, such as inflation, interest rates, taxes and growth. Their aggregate forecasts carry substantial weight.

The more closely such forecasts are examined, however, the more obvious it becomes that any consensus can shift quickly, and even completely miss the mark. When all of these crystal balls see tough times ahead for the economy and equities, there remains the one factor that can never be fully quantified — the smart investor with insight, intuition and fortune on his side.