Q2 GDP “Miss” Sparks Recession Rally

Stocks jumped higher again today after the Bureau of Economic Analysis (BEA) revealed a stinker of a Q2 GDP report. Last quarter, US GDP contracted 0.9%, badly missing the consensus estimate of +0.5%.

Depending on who you ask, the US economy is officially in recession. Fed Chairman Jerome Powell said yesterday, for example, that it wasn’t in his post-rate hike press conference.

“Think about what a recession is. It’s a broad-based decline across many industries that’s sustained more than a couple of months. This doesn’t seem like that now,” he explained.

“The real reason is the labor market has been such a strong signal of economic strength that it makes you question the GDP data.”

Well, there’s no questioning it now. The US has logged two consecutive quarters of GDP contraction.

Still, there are plenty of folks who insist that a recession has yet to arrive, including every member of the Biden administration.

Brian Deese, the current White House economic advisor, went on CNBC this morning and explained that the US is simply in an “economy transition,” not a recession.

In 2008, Deese defined a recession as “two consecutive quarters of negative growth.”

Did he have a change of heart over the last 14 years? Or did Deese’s new position as White House economic advisor have something to do with it?

Regardless, the market couldn’t have been bothered as stocks roared again after opening lower this morning. Investors clearly expect the Fed to halt its rate hikes in response to the recession, potentially as soon as its next meeting in September.

But how bad will the recession be? E-Trade’s head of investment strategy, Mike Loewengart, believes bulls should have a relatively painless downturn to look forward to.

“Today’s reading only adds fuel to the fire that we are in or entering a recession,” Loewengart said.

“While it is certainly on the negative side of the estimates, keep in mind that a 1% decrease is relatively small and supports the idea that any recessionary environment will be mild.”

Loewengart tempered his statement, however, warning investors that the bear market is by no means over.

“The Fed has been clear that controlling inflation is its top priority so it’s unlikely it will change course due to another negative quarter, although today’s report may seem contradictory to Powell’s recession comments yesterday,” he said.

“The market has been rallying in July so don’t be surprised to see the realities of the challenges that lie ahead set in for investors.”

And while the severity of the recession is up for debate, the presence of a bear market is not. Stocks are still down significantly on the year and there’s little to be excited about outside of a rate hike capitulation.

During bear markets, “dip buyers” become “peak sellers,” meaning that the current rally may not last very long. Keep in mind that the S&P is still trading below the highs of early June. If stocks retrace, a lower high will be set, likely preceding a longer-term bear market continuation.

It’s going to be a long 8 weeks until the September FOMC meeting arrives. That gives traders plenty of time to worry about whether the bear market has ended, all while tepid corporate earnings continue to roll in, potentially creating additional sell triggers.


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