Why you don’t need to worry about the GDP figure, however ugly it is

Last year, Britain saw the biggest drop in economic activity for 300 years. But as an investor, that doesn’t matter to you. John Stepek explains why – and what does matter.

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.

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.

Recommended

Has passive investing created a stockmarket bubble?
Sponsored

Has passive investing created a stockmarket bubble?

Over the past two decades, investors have been switching from buying actively managed investment funds to buying passive funds that simply track a mar…
28 Sep 2021
Why are people panicking about fuel shortages?
UK Economy

Why are people panicking about fuel shortages?

With huge queues forming at petrol stations around the country, Saloni Sardana looks at the reasons behind the fuel shortage and asks how long it's l…
28 Sep 2021
Why investors should beware of corporate waffle
Investment strategy

Why investors should beware of corporate waffle

When top executives try to retreat behind impenetrable jargon, investors should be very sceptical, says John Stepek.
28 Sep 2021
Ensign Group: profiting from US private care
Trading

Ensign Group: profiting from US private care

Nursing and care-home specialist Ensign Group should thrive as Americans age. Matthew Partridge picks the best way to play it.
28 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021