A Surprising Conclusion From This Ugly Data…

In the grand scheme of things, the government has been tracking economic data for a relatively short amount of time. This is a little surprising… and, at the same time, unsurprising.

It’s surprising because economic data is so important to policy makers and investors. Federal Reserve officials are focused on unemployment and inflation and use varied sources of information to meet their objectives. Stock markets make big moves in response to the data and analysts use the data to craft forecasts.

It’s unsurprising that data is a recent development because, 100 years ago, technology didn’t exist to capture, transmit, and process the data. Economists also didn’t really know what data to measure.

The concept of gross domestic product (GDP) was first explained in 1937. That was when an economist at the National Bureau of Economic Research provided a way to measure all of the economic production by individuals, companies, and the government in a single measure.

That formula was then tweaked over a number of years, and official data has been reported since 1947. The chart below shows the quarterly changes in GDP since that time.

Source: NYTimes.com

The size of the decline in the most recent quarter is the largest in history. There’s no official data from the Great Depression, which likely would show similar declines. But despite the lack of data from the 1930s, that story is well known. Economic struggles defined the decade.

It’s reasonable to ask if extended declines are ahead of us right now.

A New Depression?

Experts quoted by The New York Times are concerned: “In another world, a sharp drop in activity would have been just a good, necessary blip while we addressed the virus. From where we sit in July, we know that this wasn’t just a short-term blip. We did not get the virus under control.”

Another noted, “Not only have we plateaued, but we may be losing ground. To have these kinds of numbers in July when many in Congress hoped this would be over by summer underscores how unique and persistent the Covid crisis is.”

Individual investors seem to share these concerns to some degree.

Source: AAII

This is the latest data from the American Association of Individual Investors (AAII) weekly sentiment survey.

This survey dates back to 1987 — barely 30 years old, a baby compared to GDP. In an average week, 38% of investors are bullish, 310.5% are bearish and 31.5% are neutral. Last week, there was a significant decrease in the percentage of bulls.

There has been an unusually low number of bulls for the past month. Most investors are bearish or neutral.

Over more than 30 years, this survey has shown that the majority of investors are usually wrong. When there are few bulls, like there are now, markets tend to rally.

This is relatively easy to understand. If markets were easy, every investor would enjoy success. We should expect most investors to be wrong because it is difficult to hold minority views. Survey data confirms that.

Action To Take

Lately, the news has been bearish, and that is affecting the outlook of many investors as the AAII data shows.

Specifically, it seems that many individual investors have been expecting a pullback. This indicates there is cash on the sidelines. As the rally continued in the past few weeks, many investors likely became frustrated that there were missing out on gains. They could push prices higher by moving cash into the market.

In my opinion, we’re likely at one of those points where things are so bad that they can only get better… and that could be bullish for stocks over the next few months.

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