?????? GDP – Neither a trick nor a treat!

??Market Strategy Flash

In my view, the advance estimate of our nation’s nominal gross domestic product (GDP) was neither a trick nor a treat. Rather, it seemed just about right relative to the interest rate set by our central bank, the Federal Reserve. According to the Bureau of Economic Analysis (BEA), current-dollar GDP increased 4.9% year-over-year (Y/Y) in the third quarter of 2024, settling near the top of the normal historical range for growth over the past 30 years. Given an effective federal funds rate of 4.8%, monetary policy seems well-calibrated to the pace of net output.

Why should that matter to investors? Intuitively, aggregate production is an important driver of companies’ collective top line. Statistically, nominal GDP is a strong directional proxy for S&P 500 sales per share (SPS), given their correlation coefficient of 0.82 since 1997. Also, economic growth explains 70% of the variability of business sales growth across time. That’s why GDP and SPS projections have been time-honored first steps in my framework for forecasting future corporate profitability. A healthy economic pace of 5% Y/Y supports stable sales growth of 5% Y/Y, which is a solid starting point for the earnings outlook (see the chart below).

While SPS growth matched nominal GDP growth in 3Q24, business sales have generally been twice as volatile as the economy over time. Why? The S&P 500 represents the biggest and highest-quality US companies. However, that narrowly-defined index doesn’t capture the total production of the US economy, which includes smaller and lower-quality companies, households and governments. Higher sensitivity to the business cycle means sales rise above and fall below production in booms and busts, respectively. Thankfully, neither seems to be the case right now.

A stable equilibrium between national turnover and the corporate top line

Sources: BEA, FRED, WCG, 10/30/24. Notes: Shaded areas show US recessions. 4QMA = Four-quarter moving average. T4Q = Trailing four-quarter.

Definitions

GDP is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.

S&P 500 SPS measure the total sales generated by 500 of the largest publicly-listed US companies divided by the number of their shares outstanding.

A correlation coefficient indicates the strength and direction of a linear relationship between two variables, expressed as a number between -1 and 1. -1 is a perfect negative correlation, 0 is no correlation, and 1 is a perfect positive correlation. Essentially, it tells you how closely two variables tend to move together.

Disclosures

Important Information

Investment advice offered through WCG Wealth Advisors, LLC, an SEC registered investment advisor. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the companies as well as broad market, economic and political conditions. Stock investing involves risks, including fluctuating prices and loss of principal.

This is for educational / general purposes only, does not constitute investment, tax or legal advice and should not be relied on as such. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in making an investment decision for any individual. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The opinions referenced are as of October 31, 2024. These comments should not be construed as recommendations but as an illustration of broader themes.

Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Publication Date: October 31, 2024

? 2024 The Wealth Consulting Group

For Public Use in the US

652410-1