First we look at a few critical economic indicators and observe any key trends from the charts
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2.5 Key Observations
2.5.1 Pre Great Recession (2004-2008)
- From a period of 2004-2008, we saw declining GDP, until the Great Recession and the market crash took place in 2008. The GDP decline continued downwards up until 2009, where it bottomed out, and then it started climbing back up. In this period, stock market GSPC clocked in a gain of 10% in 2004, 4.9% in 2005, 15% in 2006 and 5% in 2007 until the market crash in 2008, which bottomed by February 2009.
- In the same period, we saw CPI (which is an indicator for inflation) going up between 2004-2006, where it peaked out and then it started declining from 2007 onwards, along with a declining GDP. The stock market gains were minimal in 2007 in an environment of declining CPI and GDP.
- The 10 year Treasury Bond followed a similar pattern to the CPI. In a declining GDP environment, but rising CPI between 2004-2006, bond yields continued going upwards. As CPI started declining after peaking in 2006, and declining, bond yields started going downwards apis well. The downward trend continued in 2007 and 2008, until the markets crashed.
- Taking the 10 year Treasury bond as a precursor, the Effective Fed rates kept on going up between 2004-2006 in a rising CPI, declining GDP environment. Between 2006- 2007, Fed funds rate was flat, as CPI, bond yields and GDP were declining. From 2007 onwards, the Fed funds rate moved downwards, until it bottomed out in Dec 2008.
2.5.2 The Great Depression 2008 and Economic recovery 2009-2013
- By the end of 2008, the real GDP had bottomed out. The market crash bottomed out in February 2009. CPI was trending downwards, indicating declining inflation, due to recession. The Fed funds rate also bottomed out by the end of December and so did Bond yields. In ways similar, 2008 was an entire year of recession, and markets behaved accordingly.
- In 2009, with Fed funds rate at rock bottom, we saw a growth in GDP, as early signs of economic recovery. Markets started booming in the low rate environment and early economic recovery phase. However, with rising GDP, bond yields started picking up, which actually followed Feds slightly increasing the interest rate in mid year, and again bringing it back down. All in all, markets had one of the best performing years in this environment. CPI also started picking up gradually, indicating growing inflation as a sign of early economic recovery.
- In 2010, when we should have seen a continued rise in GDP, we suddenly saw a decrease in GDP. This could be triggered by the premature adjustment of the fed funds rate. CPI dropped, also indicating a halt in economic growth. Bond yields fell as an indication that the feds will have to bring back down interest rates once again to spur economic growth, which has halted prematurely. Markets overall had a lackluster year, as hopes of economic recovery and GDP was down. So, though it was a low rate environment, the “hope” factor was no longer boosting markets, like it did in 2009.