GDP Hits Record Low; Unemployment Claims Rise; Treasury Yields Move Lower
U.S. GDP: The BEA released its initial report on GDP for the second quarter, revealing the largest quarterly drop since 1958. Down 32.9%, it was slightly less than the estimated 34.7% decline, but still severe. Consumption, which is a major component of GDP, fell 34.6% with goods falling 11% and services – the largest part of the economy, falling 43%. The second quarter was the first ‘full’ calendar quarter to be affected by Covid-19. It should be noted that ‘real’ GDP is simply ‘nominal’ GDP adjusted for inflation and the figure is annualized and seasonally adjusted.
German GDP: The world’s fourth largest economy, Germany, experienced its worst economic decline in 50 years as GDP fell 10.1% in the second quarter. This was much worse than the 4.7% drop in the first quarter of 2009, at the end of the 2008 financial crisis.
U.S. Unemployment Claims: Initial claims for unemployment insurance rose slightly to 1.434 million for the week ending July 25. This is the third straight week with an increase.
Trouble Ahead: Treasury Yields Are Falling
Treasury yields are also falling, which could indicate further deterioration of the economy. The bellwether 10-Year yield hit a record closing low of 0.54% earlier this year (March 9) and is now hovering around the same level. Negative yields are a distinct possibility. In the U.K., yields on the British Gilt are negative for maturities between 2-8 years. Yields on bonds issued by Germany and France have been in negative territory for several years. Currently, Germany’s bonds have a negative yield for all maturities from 1 to 30-years, while French bonds are negative for all maturities under 20 years.
What Lies Ahead?
We know the economy is weak. We know millions are unemployed and many will experience financial hardship as the federal unemployment subsidy ends July 31. What we don’t know is exactly how the coronavirus will unfold in the coming months, how soon will a vaccine be ready, and the impact this will have on financial markets. I think the near-term future begins and ends with Covid-19.
I suspect the virus will continue to spread; people will become increasingly hesitant to reengage; the economy will not have a robust rebound; corporate profits for many companies will deteriorate further; investors will seek shelter, sell risky assets such as stocks, and move to safety, buying U.S. treasuries; and stock prices will fall. While this is a temporary event and life will return to normal at some point, I believe it will take at least 6-12 months or more. I hope I’m wrong, but this issue is too widespread and there is no sign that it will ‘magically disappear’ any time soon. Therefore, it may be wise to reduce portfolio risk, buying stocks of companies that should benefit from Covid, and wait for the clouds to break a bit.