Nothing’s Shocking

Story Highlights:

• Thursday, the Fed and IMF extended support to some emerging markets.
• Back home, the Department of Commerce's preliminary estimate of a mild Q3 GDP contraction wasn't altogether surprising—though it'll likely be revised.
• Future economic health will depend largely on how soon the panic mentality goes away.
• But unless there is going to be an especially severe and long lasting contraction, most any slower or negative economic growth immediately ahead has likely already been priced in.

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After the last few months, big breaking news just about daily is almost expected—material or not, nothing's too shocking anymore. But vigilance and coolheaded analysis are still at a premium. We witnessed two noteworthy market developments Thursday. The US Federal Reserve, via a number of new central bank lending agreements, and the IMF, with its new "no-strings" Short-Term Liquidity Facility, Meanwhile, here at home, the preliminary GDP estimate came in at -0.3% for the third quarter.

The Fed's actions (in our view, more significant than the IMF's new facility) provide much needed US dollar liquidity to countries with a shortage. This will help stem the dollar short squeeze that has taken place over the last two months. Perhaps more importantly, investors may now feel safer reentering markets many fled during recent market volatility.

Back home, the Department of Commerce's of a mild Q3 GDP contraction wasn't altogether surprising, considering the last few months' escalating financial crisis caused a pullback in various economic activities. We should point out preliminary government estimates are fluid. The July and August contributions to preliminary quarterly GDP will be fairly firm, but September's data, the quarter's most tumultuous month, will be mostly estimated. This doesn't predict the final number will be better or worse, just that it could change significantly.

Either way, the economy has weakened, and the pullback has extended into October. The trade and government sectors continue to be the brightest spots. But consumption fell off markedly, coincident with falling disposable income. Future economic health will depend largely on how soon the panic mentality goes away. The sooner that happens (and there are some we've written about the last few days), the faster consumption and investment will bounce back. In fact, the more intense the pullback in consumption now, the faster it could rebound as people feel better and rush to make up for lost time.

Despite what you may hear, slower growth or even a mild recession doesn't spell ultimate doom for the economy or stock investors. The stock market, while imperfect, is about the best forward economic indicator we've got. Usually, the stock market upturn begins long before the economy turns up. Unless there is going to be an especially severe and long lasting contraction (and we think this), most any slower or negative economic growth ahead has likely already been priced in.

Folks planning to wait out economic trouble or gloomy headlines before again favoring stocks may miss out on the typically big early returns of a new bull market.