Divergence of US Stocks and GDP Could Foretell Future Declines

Updated by Kyle Baird
In Brief
  • Stocks appear to lag behind GDP declines in previous crises.
  • The current stock market strength may come to an end as GDP declines set in.
  • Bitcoin and other SOV assets could see upticks as confidence erodes.
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The Gross Domestic Product (GDP) for the U.S. has dropped off the proverbial cliff in recent months. However, the Dow Jones Industrial Average (DJIA) has seen recovery and now growth.

This divergence has left investors puzzled. If production in the economy of the U.S. has declined, why have the values of the stocks representing that economy risen?

One potential answer offered by technical analyst Tom McClellan is that a lag exists between GDP decline and subsequent market decline.

Chained US Dollar Shows the Lag Exists

McClellan’s analysis begins with chaining the dollar to its 2012 valuation. The term ‘chained’ represents a simple way of calculating value changes that are not touched by inflation.

Analyzing previous GDP declines, the chart indicates that the stock market tends to respond to GDP changes after a brief but noticeable lag. The delay is likely the result of investors understanding the impact of the declines and then responding negatively.

Interestingly, the chart also reveals that the current decline in GDP is far more substantial than previous declines.

The 2008 mortgage-backed securities crisis saw GDP slip 5%. However, the current crisis, primarily driven by the COVID-19 pandemic has already caused a decline of nearly 10%.

The stock market remains at high levels, and other investment vehicles like housing are strong. However, the chart indicates that the economy will eventually respond, and if previous events are predictors, the decline will be substantial.

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Bitcoin Going Steady with Stocks or Gold?

Bitcoin had previously been coupled with the stock market, rising and falling based on investment activity. However, during and the COVID-19 crisis, the premier cryptocurrency has shifted and is now mostly coupled with gold.

While gold and other stores of value assets have remained relatively strong, they have pulled back slightly from recent highs, and the same has been seen for Bitcoin. Should stocks begin to crater as the lag time closes, fear could drive investors back to precious metals and cryptocurrencies.

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