Record GDP won't mean much to investors

Stocks sell off sharply on fears that Covid-19 infections are spiraling out of control again and government leaders could have no choice but to enact another wave of lockdowns.

Posted: Oct 29, 2020 11:31 AM
Updated: Oct 29, 2020 11:31 AM

The US economy probably grew at a record pace during the summer months. But investors are already moving on, fixating on fears that the recovery could stall or reverse heading into the end of the year as Covid-19 infections surge.

What's happening: The first read of US GDP between July and September posts Thursday. Economists polled by Refinitiv expect GDP grew by an annualized, seasonally adjusted rate of 31%. Compared to the second quarter, the economy is forecast to have grown by about 7%. By either measure, that's the fastest expansion ever.

Don't expect that to impress Wall Street. For traders, who are always looking ahead, the third quarter is already old news — and what's on the horizon is starting to cause real alarm.

On Wednesday, the Dow closed down 3.4%, or 943 points, while the S&P 500 shed 3.5%. It was the worst day for both indexes since June.

Behind the drop: Concerns are growing that coronavirus cases are getting out of control again in North America and Europe.

France and Germany, the two biggest economies in the European Union, have both announced harsh restrictions in response to spiraling case loads. France will close all non-essential businesses, restaurants and bars on Friday for four weeks. Germany is shutting restaurants, bars and clubs and instructing residents to stay at home starting Monday.

The new guidelines in both countries are less severe than lockdowns imposed this spring, which brought Germany and France to a standstill. But they're significant enough to inflict economic damage at a delicate moment.

Economists at Berenberg Bank expect the new French lockdown to cause GDP to decline "significantly" between October and December, possibly by as much as 4%. GDP in Germany is now forecast to drop by 1%.

Anxiety is building that the United States isn't far behind Europe, and that new lockdowns could become a necessity. The country recently reported a seven-day average of more than 74,000 new Covid-19 cases per day, an all-time high.

The third quarter GDP data will be useful in demonstrating that once the economy can operate without social distancing restrictions, it's very resilient.

"[The third quarter] has shown that economies can snap back fast," Holger Schmieding and Florian Hense of Berenberg told clients.

But most investors are already looking past the data, and they're concerned by what they see. The report has been "utterly overtaken by events," noted Kit Juckes, a strategist at Societe Generale.

More bark than bite at Capitol Hill's tech grilling

Sen. Ted Cruz yelled. His Democratic colleague Brian Schatz called the hearing "a sham." Committee chair Roger Wicker couldn't pronounce the last name of Google's CEO.

In a contentious hearing on Wednesday, the CEOs of Facebook, Google and Twitter were questioned by senators on the Commerce Committee over their policies for policing content. But the event was short on substance, my CNN Business colleagues Kaya Yurieff and Brian Fung report.

Some lawmakers demanded more transparency, while others sought explanations on a few specific cases in which content was removed or labeled by platforms. Though the hearing was meant to focus on a crucial law, known as Section 230, that protects the companies' ability to moderate content as they see fit, senators strayed from the brief and confronted the executives on antitrust issues, misinformation about voting and election interference.

Some highlights:

  • Schatz and other Democratic senators slammed the timing of hearing, which came less than a week before the US election. "This is bullying and it is for electoral purposes," Schatz said.
  • Cruz angrily went after Twitter CEO Jack Dorsey, pressing him on the platform's decision to restrict content posted by the New York Post. He concluded by shouting at Dorsey: "Who the hell elected you and put you in charge of what the media are allowed to report?"

Brian's takeaway: "After more than two years of these hearings, it's time to conclude that many of them are worthless." Such partisan displays do little to hold executives accountable, allowing them to muddle through with vague promises of future transparency, he argues.

Much more important to investors is the earnings results Facebook, Google and Twitter are due to report Thursday, along with Apple and Amazon. Booming growth in demand for online services amid the pandemic has sent tech shares to record highs this year. Intelligence from the third quarter is crucial in determining whether frenetic gains can continue.

Shareholder rewards could make a comeback

As the pandemic battered companies in industries like oil and gas and hospitality, corporate boards moved swiftly to preserve cash by cutting lucrative rewards for shareholders. Dividend payments were slashed or halted completely, while share buybacks went out of vogue.

Now, companies are announcing plans to ramp up dividend payments and buybacks again in the wake of healthy rebounds during the third quarter.

See here: Royal Dutch Shell — which on Thursday reported forecast-beating earnings — said it was raising its dividend on an annual basis, a show of confidence in the outlook. Earlier this year, facing plunging oil demand, Shell cut its dividend for first time since World War II.

"The Board has reviewed Shell's recent performance and its plans to grow its businesses of the future, and we are confident that Shell can sustainably grow its shareholder distributions as well as invest for growth," Chair Chad Holliday said in a statement.

Not alone: Credit Suisse said Thursday that it intends to restart share buybacks in 2021 and is targeting a 2020 dividend that's 5% higher than 2019. Top US banks have also indicated that they believe they have enough capital on hand to restart buybacks when restrictions from the Federal Reserve are lifted at the end of this year.

Plans could be reversed if a new round of pandemic-related shutdowns weighs more heavily on businesses than expected. But for now, companies are sending a clear signal that they don't see foresee a looming funding crunch.

Up next

Anheuser-Busch InBev, Comcast, Dunkin, Kellogg, Kraft Heinz, Moderna, Molson Coors Brewing and Yum! Brands report results before US markets open. Alphabet, Amazon, Apple, Facebook, Activision Blizzard, Starbucks and Twitter will follow after the close.

Also today: The first look at US third quarter GDP arrives at 8:30 a.m. ET, as does data on initial requests for unemployment benefits last week. Economists surveyed by Reuters expect another 775,000 claims.

Coming tomorrow: GDP data for Europe will provide a look at the third quarter recovery — just as countries like France and Germany enact new lockdowns.

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