Trending
Written by: Nigel Green
The strong third-quarter Gross Domestic Product growth for the U.S. economy that just came out should not be the focus for investors.
My warning comes as GDP, or the sum of all goods and services produced in the economy, is revealed to be a 4.9% annualized gain for the third quarter.
It appears that consumers are still happy to spend despite the higher interest rates.
While it's important data that shows the resilience of the world’s largest economy, it should not be the focus of investors.
This data shows what has already happened. Investors need to focus on what will happen next, if they’re serious about preserving their capital and growing their wealth, because the U.S. economy faces serious headwinds in the months ahead.
There are 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 – never been wrong.
Second, the new U.S. Speaker of the House of Representatives, 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 U.S. 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 U.S. credit rating below AAA. This would be the third rating agency to downgrade the U.S.
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 U.S. 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.
Related: Maximizing Financial Success: The Dynamic Duo of Call Center Service and Financial Advisors