Broker Check

The Economic Rebound May Be Stronger Than Anticipated

| August 25, 2020
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Third quarter U.S. annualized gross domestic product (GDP) growth is expected to rise by 25.6%. That is the current estimate of the Atlanta Federal Reserve within their GDPNow forecast. The model is a widely utilized tool for assessing base case scenarios on economic growth and has often provided ample evidence of its effectiveness. As we gauge the economic data releases last week, however, our internal assessment is that the model is expected to shift higher for the third quarter following solid gains in the housing and manufacturing sectors. We learned last week that July existing home sales surged to a record of 24.7% (month-over-month) while private housing starts jumped by 22.6%. An argument could be made that pent-up demand has caused such spikes in housing and their impact may be nothing short of temporary. Although there is merit to such an assessment, the data is further substantiated by the continuing accommodative monetary policy guidelines as well as on-going positive sentiment from potential homebuyers. The ‘Home Buying Conditions’ survey by the University of Michigan recently revealed that of those who believe now is a good time to buy a house, a staggering 43% believe that low mortgage rates are the reason why. That figure stands at an average of 34% since the 2008 financial crisis, which represents one of the most accommodative monetary policy periods in modern history. In other words, it appears that sentiment, as well as lower domestic supply, are rightfully boosting the housing market in a way that may cause a stronger rebound to domestic GDP. The next revision of the GDPNow forecast is scheduled for August 26th.

Aside from housing as a growth factor, it is also critical to note the gains in the manufacturing sector over the past month as the upside has been notably stronger than anticipated. We have discussed numerous times in the past that the absolute level of growth in manufacturing can often do little to impact economic activity. This occurs because the services sector in the U.S. is four times larger than manufacturing. The reason we adamantly care about the expansionary trend of manufacturing, however, is tied to the leading impact that such expansion can have on other industries. Transportation, logistics, raw materials, industrial production, and even capacity utilization data, can all be tied to the overall manufacturing trend. As a result, the recent global trend of recovering manufacturing sectors is promising in a way that may generate higher annualized growth rates for 2020.

As an investor, you are once again wondering what this means for the short-term and how it may impact capital markets, especially amid concerns of an unresolved pandemic. The first thing to keep in mind for all investors is that they must accept the unknown, which is a message we discussed in our June 26th commentary. Accepting the unknown does not mean to stop gauging market and economic conditions. Rather, it means to remain objective in our reactions that may negatively impact our investment goals. This is true in today’s media environment more than ever. It is easy to be swayed into thinking that the economic recovery may never occur and that the potential for inflationary pressures may derail any hopes of a recovery, which may result in weak equity markets. The fact is that there is little evidence of any of that when we study such historical market and economic events. The unfortunate human impact of COVID-19 may have established a base for the next secular economic growth cycle that may produce a new era of prosperity. It is never easy to forecast the benefits over the next five years, but we objectively believe that investors may face a stark negative reality when choosing to forego current long-term equity market exposure over fears of what may happen in the short-term (6-12 months).


Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management

8/21/2020 Commentary


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

All return data sourced from Bloomberg. 

All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. 

Small Business Optimism sourced through NFIB.  Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan. 

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.  Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.

Manufacturing data – Markit PMI – Bloomberg

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