Markets seem to have reacted quite cheerily at first to the news of GDP falling only 3.8% this morning. Consensus was for the 5.5% decline so the headline of news being much better than expected popped the futures higher.

"Gross domestic product, a gauge of the nation's output, fell at a 3.8% annual rate in the fourth quarter, adjusted for inflation, from the previous quarter. The decline was the largest since 1982, though still well below the postwar record 10.4% quarterly drop seen in 1958"

I usually tend to shrug the GDP releases off completely as they are pretty much irrelevant from the stock market stand point, however, today's release made me feel quite a bit more bearish. Remember, the GDP release is only reflecting the data from several months ago, and we already knew the numbers were going to be ugly based on all the earnings warnings and retail sales data...

However, I think the "second half recovery hopes" has been just pushed a few months into the future. How is that so you might ask? Once again- very simple- let's take it step by step...

"While the fall was not as steep as expected -- most forecasts had GDP falling by 5% to 6% -- output was boosted somewhat by a rise in inventories of goods that were produced but not sold in the fourth quarter. Excluding the inventory adjustment, GDP fell at a 5.1% rate, which economists say more accurately reflects the nation's weakness"

While the 5.1% headline number itself is once again irrelevant, the inventory build news is different. Remember, GDP number represents the past and is thus irrelevant from my standpoint. Inventory buildup, however will have to be unwound in the future and is thus very disturbing. It is quite likely now that we haven't not seen the worst of the declines in the real economy last fall as many expected. I think the first quarter will be as bad if not worse than the fourth one...

Does it mean the markets will decline significantly from here? Not necessarily-but at least retest of the lows from November became much more likely occurrence. The fact that bellwethers like GE, FDX are heading down every day is not a good sign. Bonds still seem a better deal than stocks at this point... ( short treasuries ETF is an interesting play as well)

I have previously set my internal "worth case" target on the S&P 500 at around 720 based on the analysis of data from Doug Short, and while there is no reason to modify it at this point, extra caution at this point is a good thing...

Stay safe out there skepticalcapitalist@gmail.com