Gross domestic product
The Bureau of Economic Analysis will release the gross domestic product (or GDP) estimate for the first quarter of 2014 on Wednesday, April 30. The GDP is one of the most comprehensive measures of economic activity, covering all sectors of the economy, including both stocks (OEF) and bonds (AGG). Normally, the GDP announcement is a market-moving event. This Wednesday, the Fed’s April FOMC meeting announcement will be made as well, which, along with the GDP release, should produce some market shenanigans.
What is gross domestic product (or GDP)?
A country’s GDP is the total market value of all final goods and services produced within a country within a specified timeframe—like a quarter or a year. Encompassing all sectors of the economy, it’s one of the broadest measures of the economic size or health of a country. Very broadly:
GDP = Total Consumption + Total Investment + Government Expenditure + (Exports – Imports)
Highlights from the Q4 2013 release
Domestic food prices in the country have been increasing this year on account of the drought in California. Food companies like General Mills (GIS) have reported weather-affected results in the last quarter, partly due to the drought and partly due to the severe winter. The Market Vectors Agri-business ETF (MOO), which invests in food- and agriculture-based companies, is up 1.1% this year. MOO has an expense ratio of 0.53% and assets under management (or AUM) of over $3 billion. The top holdings in MOO include companies like Monsanto (MON).
GDP’s impact on financial markets
Increases or decreases in real GDP imply economic expansion or contraction, respectively. All else equal, the demand for money is higher in an expanding economy, as investors are eager to pursue new business opportunities since the underlying investor sentiment is positive. An increase in the demand for money would raise interest rates, lowering bond prices and ultimately implying costlier debt, all else equal. A decrease in GDP would imply the opposite.
In the current economic context, a higher-than-expected increase in GDP would also imply that the Fed may cease monetary stimulus sooner than expected—raising the Fed funds rate, which would also raise rates across other maturities. As bond prices fall when interest rates rise, this would impact the prices of ETFs like the Core Total US Bond Market ETF (AGG).
In the next part of this series, we’ll preview the personal incomes and outlays report for March, which will be released by the Bureau of Economic Analysis on Thursday, May 1.