Slow Growth in the Age of Acceleration

Market Insights
May 12, 2017

Slow Growth in the Age of Acceleration

The strength of economic expansions has been slowing the past 70 years.  The glory days of 5%-plus growth in the 1950’s and 1960’s are a distant memory. The flattening of the world (read more global competition), slowing productivity growth, and crowding out by the growing share of social benefits and entitlements are just a few of the reasons weighing on the growth rate.   The chart below depicts the volatility of quarterly measurements of Real GDP Growth since 1947 and a downward sloping trend line (orange dotted line): 
The growth rate of real gross domestic product (GDP) measured by the U.S. Bureau of Economic Analysis (BEA) is a key metric of the pace of economic activity. The advance estimate for the annualized growth of Gross Domestic Product (GDP) for 1st Quarter 2017 came in at 0.7%. The growth rate of Real GDP over the past 10 years is 1.3% and off the bottom in the 2nd quarter in 2009, the annualized growth rate is 2% - the slowest rate during expansionary periods (see table below): 
Slow growth in the age of acceleration sounds oxymoronic – more incongruous than “airplane food” and “almost pregnant.” Apparently, moving forward at an accelerating rate does not translate into better GDP growth.  Just as we learned early in life from Aesop's Fables not to count out the tortoise, we should give this slow growth "tortoise" economy more credit.  Slow but steady can win the race.
Low VIX in a Volatile World 
Another seemingly contradiction is the current low VIX in a more volatile world.  As a reminder, the VIX measures implied volatility on S&P 500 options.  Market volatility is greatest in bear markets. Historically, the VIX has had a strong negative correlation to market health. Thus, the VIX is often referred to as the “fear index.” 
How low is the VIX? Since 1990 (through May 11, 2017), there have been only 24 days (out of 6,895) when the VIX has traded intra-day below 10 and only 12 days when it has closed below 10.  The average is 19.6. This year, the VIX has traded below 10 on six occasions (Feb.1, May 1, May 5-10) and closed below 10 twice (May 8th and May 9th).  
Instead of looking at the glass half empty and thinking of the VIX as a fear indicator, we should be looking at a low VIX as sign of business strength, improving consumer confidence and good liquidity. A low VIX has accompanied bullish markets in the 1990s and mid-2000s.
Parting Shot
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Happy Mother’s Day!

Stock Market Dashboard

This commentary and a sampling of previous editions are available as PDFs:

5/12/2017: Slow Growth in the Age of Acceleration
Living Well in Retirement – Make Good Decisions Now
4/28/2017: And the Survey Says...
4/21/2017: Low Fees and Diversification Do Not Protect from Major Loss
4/14/2017: "Housing IS the Business Cycle"
4/7/2017: Bond Risk Rising with Rates
Exclusive Stock Market, Higher 
3/3/2017: Velocity Pivot Good for Stocks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
Trade What Is, Not What You Think It Should Be – 2017 Outlook

US Capital Partners

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.


Jeffrey Sweeney