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Don't get 'overly pessimistic' about the historic plunge in GDP, says portfolio manager: Here's why

The U.S. saw its largest-ever drop in economic activity last quarter, according to Commerce Department data released Thursday.

Twenty/20

The U.S. saw its largest-ever drop in economic activity last quarter, according to Commerce Department data released Thursday. Gross domestic product (GDP), which is the value of all goods and services produced by the economy, shrank at an annual rate of 32.9% in the second quarter of 2020, which extends from the beginning of April until the end of June.

Stocks traded only modestly lower off the news, though, because as dire as it sounds, the record-breaking drop wasn't as bad as economists feared it might be, according to a Dow Jones survey conducted before the government bureau's release.

It is a reminder that you can expect market volatility to continue throughout 2020, says Chad Morganlander, a senior portfolio manager at Washington Crossing Advisors, who manages an investment portfolio worth more than $2 billion. "Put your seat belt on. There will be volatility." 

Still, here's why he "would caution investors to have a long-term perspective and not get overly pessimistic," and what he says this dramatic decline in economic activity means for your money.

'Expect two steps forward and one step back'

GDP is key to understanding how healthy the economy is at any given time. People on and off Wall Street pay close attention to GDP because it provides a read on how consumers, businesses, and governments (federal, state, and local) are spending, as well the quantity of goods the country is both importing and exporting.

With that in mind, Thursday's report provided a telling snapshot of how the coronavirus pandemic has devastated the economy. 

The contraction in second-quarter GDP came as states imposed lockdowns across the country to contain the coronavirus. Those efforts, which forced many Americans to stay home, and businesses to lay off workers, caused a steep decline in consumer and business spending.

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What is GDP and why is it important?

Video by David Fang

It's important for investors to realize that the data is backwards looking, Morganlader says, which is why the market barely reacted to Thursday's news.

Stock prices don't reflect how companies are doing today. They reflect an investor's perception of a company's ability to earn and grow future profits, he explains: "The market is looking forward a year out and expecting a remedy to the pandemic."

Morganlander expects that the U.S. will see the economy start to bounce back in the third quarter of 2020. "We will continue to see a gradual improvement as the U.S. economy opens up," he says. "Expect two steps forward and one step back."

The markets are a 'forward-looking machine'

There are two other reasons why the major stock indexes aren't reacting in tandem with downbeat economic data, says Morganlander: support from the Federal Reserve and federal stimulus packages. 

In response to the pandemic, the Fed cut interest rates to near zero. That makes it cheaper for consumers and businesses to borrow money, or take out loans for big-ticket purchases, in an effort to help to stimulate economic activity.

I would caution investors to have a long-term perspective and not get overly pessimistic.
Chad Morganlander
senior portfolio manager at Washington Crossing Advisors

The $2.3 trillion economic rescue package known as the CARES Act also provided economic support to both businesses and consumers, and lawmakers are working on another stimulus bill to keep the U.S. economy afloat.

Wall Street expects that money will help companies remain resilient as the pandemic continues, Morganlander says: "The markets are a perpetual forward-looking machine."

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