Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the GDP Data Shows We Are Not in a Recession Yet
Transcript
- Lucas: So the VIX is at 18.77, the VVIX just crossed 104, and the S&P 500 is down about 0.8 percent in the last five days. That combination usually gets people worried about a recession. Luna: Right, because when volatility spikes and stocks drop, the natural instinct is to assume the economy is about to roll over. Lucas: Exactly. But if you look at the GDP data we got for the first quarter of this year, it tells a completely different story. Nominal GDP hit 31.86 trillion dollars, and real GDP growth annualized came in at 2.1 percent. Luna: That's solid. Not booming, but certainly not recessionary. Lucas: Right. And remember, the previous quarter real GDP growth was only 0.5 percent, so we actually accelerated. That's the opposite of what you'd see in a recession. Luna: So why is the market so spooked? Lucas: That's the question. The VIX is up over 9 percent in the last five days, and the VVIX — which measures volatility of volatility — is up over 10 percent. That suggests options traders are pricing in more tail risk. Luna: But tail risk for what? If GDP is growing, earnings should be okay. Lucas: Well, part of it is the Fed. Dallas Fed President Logan just said she wants 'modestly' higher rates. That spooks the bond market, and then the equity market follows. Luna: And the yield curve is still positive — 37 basis points on the 10 minus 2 — so we're not inverted. But it's been narrowing lately. Lucas: That narrowing is actually worth watching. A steepening yield curve can sometimes signal that the market expects growth to pick up, but when it's driven by long-term rates rising on inflation fears, it's less comforting. Luna: So the market is essentially pricing in a recession that the GDP data doesn't support yet. Lucas: I think that's fair. And that's why this is such an interesting moment for long-term investors. If you believe the GDP numbers are more real than the VIX fear, then buying the dip might make sense. Luna: But if the Fed keeps hiking and the yield curve inverts again, then the market could be right. Lucas: Exactly. So the question becomes: which signal do you trust? The real economy, or the fear gauge? Luna: I mean, historically, the VIX at 18 is not that extreme. It's elevated, but not panic territory. Lucas: Right. 18.77 is above the long-term median, but we've seen much higher. The VVIX at 104 is more concerning, because that suggests the market expects volatility to become more volatile. Luna: Which usually happens around big events — like a Fed meeting or an election. Lucas: And we have both coming up. The Fed has meetings in September and December, and midterms are in November. So there's a lot of uncertainty baked in. Luna: But the GDP data is from Q1, which is already a few months old. So maybe the market is looking forward to Q3 or Q4 slowing down. Lucas: That's possible. And the 2.1 percent growth rate is solid, but it's not so strong that a small shock couldn't tip us into a slowdown. The key is whether the consumer holds up. Luna: And with rates at 4.57 on the 10-year, borrowing costs are higher, which does pinch. Lucas: If today's conversation helped you think about this data more clearly, we should mention that the way we keep these episodes ad-free is through listener support. If you've found value, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a simple way to keep the show going, and it's completely voluntary. Luna: Yeah, we really appreciate that. It helps us stay independent and focused on the data. Lucas: Alright, back to the data. One thing I want to highlight is that the Russell 2000 is actually up 0.3 percent over the last five days, even as the S&P is down. Luna: That's interesting. Small caps are usually more sensitive to recession fears, so them being up suggests some investors think the economy is okay. Lucas: Right. Or at least that the worst is already priced in for them. The Russell had been lagging for months, so maybe it's catching up. Luna: So we have this divergence: large caps down on volatility, small caps up on value. Lucas: Exactly. And that's the kind of rotation you see when the market is trying to figure out if the economy is going to slow or not. Luna: If I were an investor, I'd be watching the next few weeks. If GDP data for Q2 comes out and shows continued growth, the VIX should drop. Lucas: Absolutely. But if we start seeing jobless claims rise or consumer confidence fall, then the market's fear might be justified. Luna: So the play here is patience. Don't panic based on the VIX, but don't ignore it either. Lucas: Exactly. Use the GDP data as your anchor, and treat the volatility as noise until the fundamentals change.