Addressing Recession Concerns

For some investors it may feel as if the market can’t catch a break. After what has already been a difficult start to the year, last week’s GDP report confirmed that economic growth slowed for the first time since the pandemic began. This news, along with higher interest rates and faster Fed tightening, drove the S&P 500 back into correction territory and the Nasdaq into a bear market. However, there is also positive news beneath the surface that could matter more in the months, quarters and years ahead. What should long-term investors focus on during this challenging period?

The latest GDP report for the first three months of the year showed that the country’s gross domestic product shrank by 1.4% on an annualized, quarter-over-quarter basis. This simply means that there was less spending in some parts of the economy last quarter. While this was a negative surprise, even the 1% growth rate that economists had expected would have been a deceleration. At this point, the drags on the economy are well known – high inflation and energy prices, rising rates, Fed rate hikes, the war In Ukraine, and more.

Under the surface, there were actually some positive signs. Consumer spending grew 2.7% even after adjusting for inflation. Also, while economic growth slowed compared to the previous quarter, it still rose 4.3% when compared to the prior year. It was mostly a decline in government spending, a worsening trade deficit and changes to business inventories that made overall GDP negative last quarter - factors that could rebound too.

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