Economics

Building the Wall of Worry

GDP dropped 3.8% for Q4 2008—a dismal end to the year. Economic news will likely get worse in 2009, but expect the market to improve before the economy.

Story Highlights:

  • 2008 fourth quarter GDP shrank 3.8%. While the decline was less than forecasts of a 5.5% drop, it's still not a welcome figure.
  • With a decline in consumer spending and a spike in job losses, some pundits warn the result is merely an indication of more gloom ahead.
  • And while economic news will remain dour well into the year, investors should muster the strength to look beyond current woes.
  • Amid the doldrums, a new bull market is likely to emerge this year and well before the economy bottoms.

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As expected, the US economy didn't fare too well in 2008's final quarter. In fact, the initial GDP figures released Friday showed 3.8% decline—the largest quarterly drop since 1982 when the US saw a 6.4% decline in first quarter GDP. While GDP was actually positive for the entire year (1.3%), much of the deterioration came in the second half of 2008, with Q4 taking the brunt.

Heck, it's hard to keep your chin up on the heels of such dour news, especially when many believe the Q4 GDP figures are just a taste of what lies ahead. They could be right.

But we'd argue there's a lack of precision in expert forecasting these days, and anyway, GDP numbers are subject to further revisions. Expectations for the economy and corporate earnings have been all over the place recently. Such uncertainty almost always leads to instability—up and down. And even after the economy actually begins recovering, it will still be awhile before that's reflected in official data (which lags) and before the economy "feels" improved. So don't expect forecasters to be optimistic or their forecasts to be very precise this year.

New bull markets traditionally climb a wall of worry. And given Friday's headlines, we can all agree there's enough worry right now to build a wall giving the one in China a run for its money. Remember, historically, markets improve before the economy does. While there are certainly unique circumstances to this bear, that part should be no different.

Instead of getting caught up in the economic fray, nervous investors should take a longer view and look to the recovery ahead. It is still a fact that bulls always follow bears. The massive wave of global monetary and fiscal stimulus already being implemented and a tantalizingly cheap stock market will eventually push sidelined cash into stocks. Only the exact timing is unknown.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.