The Gross Domestic Product – the total value of all goods created in the country – dropped by an annualized 32.9% in the second quarter. For those of you who understand economics terms, that’s an astonishing number. For those of you who only casually follow economics, consider that the experts view it as astonishing.
The largest recorded quarterly drop, through all of our crises, prior to this has been about 10%. We saw less than a 10% drop during the financial crisis of 2008, and less than 5% after 9/11.
This is triggering an immediate sell-off on Wall Street, with the Dow Jones tumbling this morning from the initial bell. This is happening despite the fact that the Dow Jones valuation has become steadily more uncoupled from production as the federal government has directly intervened to support key businesses. Zero-interest loans, low-interest long term loans, grants and government contracts have all been used to increase the perceived value of the Dow Jones stocks and provide the appearance of a strong economy.
This tactic was pursued under Obama, and appropriately condemned by many Republicans at the time. The efforts under Obama pale compared to those undertaken by Trump, and those same Republicans tend to be completely silent now. Many Democratic leaders are hesitant to call Trump and the Republicans on their blatant fraud because it is a tactic which they used themselves in a far more moderate fashion and which they may desire to use again.
The actions have proven useful; by promoting confidence in our stock markets, regular investors have been encouraged to support large and mid-level listed businesses and foreign investment money has been lured into the United States.
The economy itself is already damaged by covid-19 and the continued failure to take corrective actions. We shut down, but during that incomplete (compared to New Zealand, Scotland, Peru and many other countries where people were kept from even being on the streets) shutdown we failed to set in place plans to isolate the virus. This has ravaged the economy. The Dow’s recovery has been predicated on the hope that investors won’t notice the glaring differences between the real economic numbers and the purported valuation of stocks.
The one small bright side for stocks is that the estimates were that the economy would drop by about 34%… so 33% is a little bit better, and the brokers and investment houses had the opportunity to warn their clients this would be coming. They may have convinced many of the larger investors to remain in stocks for the long haul. Or they may not have been successful, and we’ll see a precipitous drop over the next few days and weeks.
The party may be over, or the immediate drop may be a hiccup. At the very least, the lights are flickering, warning people it may be time to leave soon. With the massive drop in productivity, there is a very real risk that investors may start to wonder what, exactly, they’re investing into.