In just a few days, America will be served the worst quarterly GDP print in the history of modern economic statistics. Keep your favorite digestif handy.
In a sign of the times, the numbers are unlikely to move markets. Analysts and economists have spent the last four months tweaking their forecasts. The median estimate calls for a 35% annualized contraction.
Whatever the actual number is, it will mark the most spectacular collapse in the post-War era.
This is old news for market participants, if certainly not for the millions of everyday Americans living the recession, as it were.
The collapse was priced into risk assets during March’s dramatics. Equities and credit then spent the next four months anticipating a recovery and drooling under the influence, as a massive dose of monetary heroin coursed through the market’s veins.
A look under the hood reveals the “truth”. Investors’ preference for tech and secular growth lays bare a lack of faith in the fledgling economic comeback. Even with last week’s stumble, the Nasdaq 100 is trading near dot-com levels relative to the S&P.
Mega-cap tech are the new utilities. It’s simple really. You seek safety in the oligopoly whose businesses pervade nearly every aspect of human existence. The pandemic reinforced the trend towards a digitized, virtual world.
The market cap of the five largest stocks now sits at 22%. Concentration has never been this high.
There’s no shortage of fanfare around gold’s performance in 2020. The “Great Debasement” and deeply negative real rates have pushed spot prices beyond $1,900 for the first time since 2011.
And yet, as impressive as gold’s YTD gains most assuredly are, they still trail the FAAMG cohort. Notably, the S&P would be down nearly 6% were it not for the titans.
“The S&P 500 has never been more dependent on the continued strength of its largest constituents”, Goldman notes. “From the perspective of a macro investor, record market concentration represents a risk to aggregate index performance”.
You could have made the same argument for years, and yet one question we need to ask going forward is what happens in the event mega-cap tech rolls over just as it becomes apparent that the US economic recovery is off track.
After all, the narrative that tech has benefited from doubts about the recovery implicitly assumes the flip side — that if tech faltered, it would be because the economy was on track, paving the way for value, high beta, small-caps, and every other laggard, to suddenly outperform.
But clearly, that kind of pro-cyclical rotation isn’t likely to play out if the recovery stalls as states halt the re-opening push. Jobless claims rose for the first time since March last week and may rise again.
This, as Congress dithers on the next stimulus bill, and is almost guaranteed to slash extra federal unemployment benefits by at least half.
The worst-case scenario would be the economy swooning anew just as tech refuses to play Atlas to an increasingly heavy equity market. In that situation, it’s hard to see what sector could take the baton.
Apple, Facebook, Google, and Amazon all report results in the week ahead. Any Netflix-like “mistakes” or Intel-esque “surprises” would not be welcome set against a deteriorating macro backdrop.
Coming full circle to the GDP numbers, BMO’s Ian Lyngen and Jon Hill write that “the issues surrounding data collection have widened the error bands for real GDP estimates and therefore any miss/ surprise in the single-digits will be dismissed by investors as close enough”.
“Recasting the macro narrative based on the depths of the recession realized in Q2 is unlikely”, they went on to say, adding that “instead, it’s the slowed progression of reopening efforts that can claim the lion’s share of responsibility for the dimming recovery outlook”.