US GDP is Irrelevant

The American economy contracted only 0.7% in the second quarter, the government finalized today. That’s down from its previous projection of 1% and practically seals the deal for a positive GDP number when Uncle Sam gives his initial third-quarter guess in late October.

Still, this is the fourth consecutive official drop in GDP — the longest U.S. economic losing streak since records began in 1947. The economy has contracted 3.8% since then, the deepest pullback since the Great Depression.

Paging through the fine print, there’s only one outlier — one segment of blockbuster growth while the rest of the economy muddles through, at best: federal government spending, up 11.4%.

“In some ways, the whole GDP discussion is irrelevant,” says Chris Mayer. “As investors, we care about markets, and not GDP growth. There is a great fallacy out there that if the economy does well, stocks should do well (or if the economy does poorly, stocks should do poorly). Hence, too many so-called investors waste an inordinate amount of time talking about recovery, or lack thereof.

“It’s possible that GDP does expand strongly. But investors could still lose. We have one glaring historical example: From 1964-1981, GDP grew 370%. And the sales of the Fortune 500 more than sextupled. Yet the Dow Jones industrial average went from 874 on Dec. 31, 1964, to 875 on Dec. 31, 1981.

US GDP vs US stocks

“As Warren Buffett once wrote: ‘Now, I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.’

“For investors, it is all about the price paid. The really relevant question is not one of whether or not the economic recovery is real. The question is are stocks cheap enough? To answer that, you have to look at stocks and compare them with the alternatives.

“My answer is some stocks are cheap and some are not. It is hard to generalize. In my view, investing is a craft of the specific. It is in the picking of the trees in which investing skills pay off the most, not in assessing the forest. There are, undoubtedly, specific stocks that will prove nice investments over the next few years. Finding them is what we are all about.”