Why Does Gross Domestic Product (GDP) Matter?

20
Jul

Why Does Gross Domestic Product (GDP) Matter?

When looking to protect your financial future in today’s COVID-19 environment, it’s essential to understand how the economy functions on a historical basis as it relates to the country’s GDP (Gross Domestic Product) and the stock market.

GDP is measured quarterly by adding personal consumption expenditures, government spending, business investment, and exports, then deducting the country’s imports. GDP is the total of everything produced by a country. Even if manufactured by a foreign company or foreign workers within that country’s borders. A country that has its own companies producing goods overseas does not count those products in its GDP, even if those goods are sent back for the country’s consumers to buy. Many U.S. companies choose to produce their products outside of the U.S., resulting in a lower GDP than compared to other countries. Additionally, GDP growth is a measure of any economy’s growth but is not always an accurate indicator of stock market performance.

Decade Before COVID-19

In the decade before COVID-19, the U.S. had a connected economy and stock market:

  • The economy was growing.
  • The Stock Market tripled.
  • Low unemployment.
  • Continuing economic growth predicted.
  • The economy and stock market were connected.

Today, the U.S. has a disconnected economy and stock market:

  • For the first time since the Great Recession, the market and the economy are moving in opposite directions.
  • The $2.6 Tr CARES Act has increased the market, but the effects social distancing remains.
  • Q2 GDP: -11%+ drop expected
  • “It’s the economy.” — James Carville, 1992

Indicators

Indicators that will continue to be relevant to stock market performance include the current economic conditions, changes in financial conditions for companies, and future production forecasts. Problems that will continue to impact recovery:

  • The U.S. has shifted from an Industrial Economy to a Service Economy (not counted in GDP).
  • We are now ‘more efficient’ consumers, purchasing fewer non-essential goods than before COVID-19.
  • Low energy prices = reduced economic expansion.
  • Decreasing consumer spending and business expansion.
  • Increasing unemployment.
  • The U.S. continues importing more than it is exporting.

When the stock market is over-performing or under-performing, consumer confidence directly affects our GDP. During a bull market, there is optimism about the economy and consumer spending increases. However, when a health pandemic occurs, and people are not working, consumers are reluctant to spend. This situation dramatically impacts GDP, and ultimately, your market-related investments.

Gross Domestic Product and Debt

Additionally, GDP and debt are related. When GDP is low, the government collects less in taxes from sales of U.S. made products. With the U.S. deficit higher than ever and low GDP, the deficit will be a concern for lawmakers and citizens alike as tax collection to offset deficits will impact.

If you have questions or concerns regarding how GDP and today’s economy will impact your portfolio, now is an excellent time for us to discuss how to protect your retirement.

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In conclusion, we specialize in providing strategies and guidance for those who are seeking a better lifestyle in retirement. At LKN Financial, we know that it is your retirement, and you should have control over it. We offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!