Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why Real GDP Growth Is Cooling Faster Than the Stock Market
Transcript
- Lucas: So the GDP numbers came out a few months ago, and they're still worth talking about, because they frame everything we're seeing in markets right now. Real GDP growth annualized at one point five percent for the first quarter. That's down from two point one percent the quarter before. Luna: And yet the S&P 500 is hovering around seventy-seven hundred, near record highs. That's a pretty stark gap between the economy and the market. Lucas: Exactly. And it's a gap that keeps widening. Look at the last five days — the Dow is down almost a percent while the S&P is basically flat and the NASDAQ is up a bit. That's not just noise; that's a market that's becoming increasingly selective, favoring the big names that can still grow even as the economy slows. Luna: And the yield curve is steepening again — the ten-year minus two-year spread is up to forty-seven basis points. That usually happens when investors expect either growth or inflation to pick up. But here we are with growth slowing. Lucas: Right, and that's the puzzle. Normally a steepening curve is a good sign — it means bond traders are pricing in a stronger economy down the road. But this time, it might be more about the Fed. They've been cutting rates, and the market is starting to think they might be behind the curve. So you get this weird mix of slowing growth and a steepening curve, which historically is a late-cycle signal. Luna: So is the market just ignoring the GDP slowdown because of AI? I mean, Nvidia just lined up five hundred billion dollars in financing, and their CEO is calling chips an investable asset. That's a lot of money betting on one story. Lucas: It's a huge bet, and it's not just Nvidia. The whole mega-cap tech complex is spending like there's no tomorrow on data centers and AI infrastructure. That spending shows up in GDP, but it also creates this feedback loop — the more they spend, the more the market rewards them, which lets them borrow even more. It's been a virtuous cycle for a while, but those cycles don't last forever. Luna: And when they slow down, the market might suddenly remember that the rest of the economy is growing at one point five percent, not three. Lucas: Right. And that's the risk. The market is pricing in a lot of future earnings growth that's concentrated in a handful of companies. If that capex cycle falters, or if AI doesn't deliver the productivity gains people expect, the correction could be sharp. But there's another angle here that's interesting — productivity. Luna: Because real GDP is only one point five percent, but nominal GDP is growing faster. The gap between nominal and real is inflation. So maybe the economy isn't as weak as the real number suggests. Lucas: Exactly. Nominal GDP is up to thirty-two point four trillion, and that's what actually drives corporate revenues. So even if growth is slowing in real terms, companies might still be able to grow their top line because prices are still rising. The question is whether that's sustainable. Luna: And whether the Fed sees it that way. They've been cutting rates, but if inflation stays sticky, they might have to stop. That would be a double whammy — slower growth and tighter financial conditions. Lucas: That's the scenario that keeps me up at night, honestly. But let's step back and look at what history tells us. When you have a slowdown like this, the market often doesn't top out until after the Fed stops cutting or even starts hiking again. We're not there yet. Luna: So you're saying the market could go higher from here even as the economy cools? Lucas: It can, and it has before. In the mid-nineties, you had a similar setup — the Fed was easing, growth was slowing, but the market kept climbing because of productivity gains from tech. Eventually it ended in tears, but not before a long run. The difference is that back then, valuations were more reasonable. Now the ten-year is at four point six five percent, and earnings yields are much lower. That's a higher bar. Luna: Yeah, the earnings yield on the S&P is probably around four percent, so you're not getting paid much to take on equity risk versus bonds. Lucas: Right. And that's why I think the real signal to watch isn't the GDP print or even the yield curve — it's earnings. If companies start guiding down, especially the ones that aren't part of the AI trade, then the market will have to reprice. We're in the middle of earnings season now, and so far it's been okay, but the guidance is cautious. Luna: And credit spreads are still tight. If that changes, that's a big warning sign. Lucas: Absolutely. Investment-grade and high-yield spreads are still historically narrow, which means bond investors aren't worried about defaults. But that can change quickly, and it's often the canary in the coal mine. When spreads start to widen, it means the market is starting to price in a downturn, and that's usually before the stock market fully catches on. Luna: So what would you be doing right now if you were a long-term investor? Buying the dip or waiting on the sidelines? Lucas: I'd be selective. The dip in small caps, for example — the Russell is up a bit this week, but it's been lagging for a while. That's not necessarily a buy signal. You have to look at each company's balance sheet and cash flow, not just the index. And I'd be watching the labor market closely. JOLTS and jobless claims are going to tell you more about the consumer than the GDP number. Luna: Because if people start losing their jobs, that's when the slowdown becomes self-reinforcing. Lucas: Exactly. And that's the thing — the market can ignore a lot of bad news, but it can't ignore a rising unemployment rate for long. So I'm watching that more than anything. Luna: And if today's conversation helped you think about your own portfolio, you know what to do. Lucas: That's right. These conversations stay ad-free because of listeners like you. If you got value out of this, you can support the show at buy me a coffee dot com slash fexingo. It's a small way to keep us going. Luna: And we appreciate it. But back to the market — so if you're not going to panic, what's the one thing you'd tell a friend who's nervous about this disconnect? Lucas: I'd say stay invested but keep your expectations in check. The days of double-digit returns from a rising tide might be over for a while. Focus on quality, avoid leverage, and make sure you have a cash cushion. Because the next few quarters could be choppy, and you want to be able to sleep at night. Luna: That's a solid note to end on. Thanks for joining us, and we'll see you next time.