Stocks Don't Look Back to the Future

It's official: US GDP growth slowed in the third quarter. But we're not worried. GDP doesn't tell you much about the future. GDP is an aggregation of data of something that's already happened. Markets don't care about data pointing backward. Markets are forward-looking—they discount widely known information and therefore are the best indicators of future economic activity. You can't look back to see the future. Here are a couple examples.

In 1974, the US went through one of the worst recessions since the Great Depression. Yet at the time most believed the economic expansion continued. In fact, President Ford was confident enough of a healthy economy to implement measures crimping consumer demand, adopting the popular slogan "W.I.N." (Whip Inflation Now!). Unfortunately inflation was masking the fact recession had already set in, and anti-inflationary measures only served to exacerbate the problem. Markets recognized the situation before official GDP numbers were released and headed downward well in advance of the recession's onset.

The most recent example is 2001. Markets priced economic weakness beginning with the bear market in 2000—long before anyone was wailing recession woes.

The basic formula for GDP growth is signaling higher growth for the immediate future. Domestic and foreign consumption remain strong, business investment is rising, government spending is accelerating and emerging markets such as China continue a massive infrastructure build out, and export and import activity are both thriving across borders. Additionally, productivity and benefits from globalization are flourishing, companies have strong balance sheets, and global monetary conditions remain accommodative. Global growth should be stronger than most expect.

This year stocks are surging ahead. The only leading indicator that truly matters is signaling economic strength. Don't look back to see the economic future…unless you're hiding a time machine in your garage.