Last year, Britain saw its biggest fall in GDP since the great frost of 1709, which I’m sure you all remember well. It turns out that if you shut down your entire economy, then GDP falls.
The worst downturn in more than 300 years, eh? You’d expect that to have an impact on markets wouldn’t you? Well, no. Despite the fuss made about them, GDP statistics are probably about the most useless “big name” economic indicator for investors.
Here’s why GDP doesn’t matter to investors
Let’s start with a quick question: did you think the economy did well last year, or did you think it had done badly? The answer is obvious. Entire sections of the economy – activities that add to our GDP – have been shut down for almost 12 months now. Of course GDP has fallen.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
So having this sneaking suspicion confirmed this morning is not news – it’s not new information. And that’s the key here for markets, as far as economic data and any other information goes, for that matter. Markets are all about new information. You can look at it this way: you don’t get paid for telling markets what they already know. You get paid for bringing genuinely new news to markets.
So this is why worrying about GDP figures is a massive waste of time; they are always historical. By the time you find out that economic output fell by 9.9% precisely in 2020 – well, you already knew that. In fact, markets had already priced that in around about the middle of March.
After that, they started to price in the recovery. And indeed, while it’s a bit obscured by the “worst economic hit in 300 years” headlines, GDP expanded again in the fourth quarter of last year, rising 1% in the three months to December. That was better than economists had expected (though again, not a statistic to have a huge amount of market impact because it’s backward looking).
GDP does of course have lots of other flaws. Among those, it is regularly heavily revised, years down the road from the original reading, which is another reason for it being useless in terms of timely market information. And it comes in for lots of other criticisms, including that it encourages a focus on the wrong things.
I’m not sure that these criticisms matter so much. I’m absolutely not one of these people who thinks we should replace GDP with a "national happiness score" or something similar. There’s nothing wrong with keeping our politicians minds’ focused on something tangible, even if the measure itself is widely acknowledged to be flawed.
A "happiness"-based measure is a great way to let the government off the hook altogether. And happiness is a slippery concept. I’m sure you can all think of ways to make a population more "happy" even as its standard of living is collapsing into the dust. National happiness levels in North Korea are, I’m sure, always at 100%.
What does matter?
However, my point is – if you’re an investor, you can largely ignore GDP, because it doesn’t tell you, or the market, anything you didn’t already know. So what does matter? Well, as we’ve already said, the market tries to price in what’s going to happen in the future. And right now, the future looks brighter than the past.
We’re likely to see GDP fall again this quarter, because we’ve shut the economy down again. But the vaccine rollout is going quite well, it seems. And despite concerns about other strains, vaccines also seem to be able to reduce the severity of cases even for people who do get coronavirus after being jabbed.
Despite the aggressive talk from politicians (and undeniably worrying headlines about being put in jail for ten years if you go abroad and then lie about which country you’re coming back from), it’s hard to see how perpetual lockdown is sustainable. And once we’re allowed out, there will be spending. So it makes sense that markets are pricing in a brighter future, not to mention a more inflationary one.
That said, there are plenty of areas where there are signs of exuberance. In this week’s MoneyWeek podcast, Merryn talks to Duncan Lamont of Schroders, one of our favourite market statisticians, who explains that basically nothing is cheap relative to history. That doesn’t mean that there aren’t opportunities out there – but you have to delve a bit deeper to find them (listen to the conversation here).
In fact, I wonder if the lifting of lockdown will coincide with many of our current investment bubbles popping. When people have less time on their hands, and more outlets for their boredom, it might not be as tempting to pile in on shares like GameStop, for example.
We’re keeping a close eye on such bubbles in MoneyWeek magazine at the moment. If you’re not already a subscriber, get your first six issues free here.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
From oil to copper: how to trade wisely when capitalising on mega trends
By MoneyWeek Published
Thousands of pensioners forced to claim back huge amounts in emergency tax
Some retirees are losing more than £50,000 in emergency tax when they withdraw money from their pensions, which then has to be clawed back from HMRC.
By Ruth Emery Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published