Economic Growth Contracts At Fastest Rate Since 1982

The market is disappointed with this morning's economic news, which showed that Q4 GDP contracted at a rate of -6.2% (vs. -5.4% consensus). This is the steepest drop in economic activity since 1982. Given that consumer spending is a big part of this calculation, and that it remained weak well into Jan-Feb, it is likely that Q109 GDP will also show significant weakness.

Nonetheless, I have been saying that the massive monetary and fiscal stimulus will begin to produce its desired effect, and GDP growth should begin to rebound later this year and into 2010. These stimulus programs always have a considerable lag before they start to kick in, and given the severity of the contraction, it is taking a little longer this time around.

While the market is in a rough spot right now, I also believe it will begin to price in the rebound in economic growth sooner than later, and the second half of the year should be stronger as a result. My forecast is for the market to actually sqeak out a positive year by December 31st. I know that seems heretical now, but it is still early in the year.

Asian markets were mixed overnight, with Japan higher and China lower; the dollar is mixed today vs. the Yen and the Euro; oil is trading lower (near $43.50), while gold is back above $950; the 10-year yield is higher for a 5th straight day, to 3.02%; and the VIX is slightly higher to 45.7.

Trading comment: The S&P 500 broke below its November lows this morning, but has since rebounded. The Nasdaq and Russell 2000 have actually climbed back into positive territory. While I have said that a break of these November levels could lead to new lows, I think we could see a bounce first.

The market is very oversold at this juncture, so piling on additional shorts into this weakness is a high risk proposition. I think a more prudent strategy will be to wait for a bounce, and add back some hedges into any market strength.