Written by: George Prior
The strong third-quarter Gross Domestic Product growth for the US economy should not be the focus for investors, warns the CEO of deVere Group.
The warning from Nigel Green, chief executive of one of the world’s largest independent financial advisory, asset management and fintech organizations, comes as GDP, or the sum of all goods and services produced in the US economy, is revealed to be a 4.9% annualized gain for the third quarter.
“This is the strongest output since the fourth quarter of 2021. It appears that consumers are still happy to spend despite the higher interest rates.
“While its important data that shows the resilience of the world’s largest economy, it should not be the focus of investors,” he says.
“This data shows what has already happened. Investors need to focus on what will happen, if they’re serious about preserving their capital and growing their wealth, because the US economy faces serious headwinds in the months ahead.”
The deVere CEO cites three major reasons that indicate the economic trajectory might not be as rosy in the near future.
“First, the bond market is sending red-flag signals that it believes a recession is looming. For more than a year now, we’ve seen an inverted yield curve, which is when the yield on the two-year Treasury has overtaken that of the 10-year note.
“From the 1960s to today, every time the long-term rate was lower than a short-term rate, a recession followed. It’s happened for the last eight recessions – and it's never been wrong.”
He continues: “Second, the new US Speaker, Mike Johnson, a close ally of Donald Trump, will be less inclined to make deals than Kevin McCarthy.
“Therefore, he’s more likely to affect a partial government shutdown in mid-November in order to try and seize a political advantage. It is also more likely that under this scenario, a shutdown would be extended - unlike the previous, more symbolic, ones.
“A government shutdown creates uncertainty about the world’s largest economy, budgetary decisions, and the potential for disruptions in federal services. It erodes investor confidence, both domestically and internationally, meaning investors pull back from the US financial markets, leading to a decrease in asset prices and potential capital flight.
“We expect that should a shutdown occur, it will prompt Moody’s to cut the US credit rating below AAA. This would be the third rating agency to downgrade the US.”
Nigel Green adds: “And third, the Israel-Hamas war will weigh on sentiment as individuals and businesses become more risk averse about spending and investing, which could lead to a recession.
“Also, conflicts in the Middle East tend to lead to spikes in oil prices which can trigger significant uncertainty in global markets.”
Against this backdrop, investors are being urged not to feel “too fuzzy” about the latest Gross Domestic Product growth data for the US economy.
“Investors shouldn’t be complacent about this strong data. They shouldn’t focus on the backward-looking; they should be thinking about what’s next, particularly the headwinds on the horizon.
“We would urge them to review their portfolios to mitigate risks and seize the opportunities that will come from a shifting investment environment,” concludes Nigel Green.
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