Blog : GDP Glass Only Half Empty; The Moon and Stock Market Returns

by Ed Zwirn on January 30th, 2014

The market's positive reaction to the latest GDP estimate notwithstanding, the last quarter of 2013 saw no blockbuster return to economic growth in the U.S.

The headline figure may have helped boost the market while it was badly in need of a boost, but the details show no cause for optimism.

According to the advance estimate, GDP increased 3.2% in the fourth quarter. That was down from a 4.1% gain in Q3 2013 but slightly above the 3% that had been priced into market expectations. Last month, third quarter GDP growth had been revised up to 4.1% in the third estimate, up from the second estimate's 3.6%, giving Q3 the best showing since the economy expanded 4.9% in Q4 2011 and showing a sharp pickup from Q2 2013's 2.5% rate of growth.

But the Q4 gain, such as it was, can actually be viewed as a disappointment. While the pleasant Q3 surprise had been driven largely by increases in sales receipts, Thursday's Bureau of Economic Analysis showed that real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 1.8% in the fourth quarter, compared with an increase of 3.9% in the third.

Part of the disappointment also came from the residential investment sector. After posting double-digit gains each quarter since Q2 2012, residential investment spending fell 9.8%, even as new home starts reached the million mark, driven by weaker home sales numbers, which lowered realtor fees, and a decline in home improvement spending. Government spending declined 4.9% in Q4 after increasing 0.3% in Q3 2013, driven by a 12.6% decline in federal spending.

The BEA's summation of the U.S. economy's performance during all of 2013 also made for some grim reading. Despite the relatively strong showings seen in Q3 and Q4, real GDP increased by only 1.9% in 2013 (that is, from the 2012 annual level to the 2013 annual level), compared with an increase of 2.8% in 2012.

The increase in real GDP in 2013 primarily reflected increased personal
consumption expenditures, exports, and residential and nonresidential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in the growth of real GDP in 2013 primarily reflected a deceleration in nonresidential fixed investment and a larger decrease in federal government spending.

Are Investors Moonstruck?

Are you having a difficult time timing the market these days? Maybe you need to pay closer attention to the Farmer's Almanac.

Readers of this blog may remember the space I have devoted to various calendar effects, according to which the behavior of the market in January, for example, can be used to predict performance for the full year. Other calendar-driven market phenomena are said to include the so-called Halloween Effect, the "day of the week" effect, the calendar month effect and the holiday effect.

Here's another one I ran across: According to a 2001 paper I dug up, there appears to be a correlation between the phases of the moon and returns on the stock market.

Kathy Yuan, Lu Zheng and Qiaoqiao Zhu of the University of Michigan looked at the relation between lunar phases and stock market returns of 48 countries. The findings indicate that stock returns are lower on the days around a full moon than on the days around a new moon. The magnitude of the return difference is 3% to 5% per annum based on analyses of two global portfolios: one equal-weighted and the other value-weighted.

In addition, they also found that this effect was more pronounced for smaller companies, an outcome which they attribute to the higher levels of institutional ownership to be found among large-cap stocks. "The lunar effect is more pronounced for NASDAQ and small-cap stocks than for NYSE-AMEX and large-cap stocks," they write. "The evidence suggests that the lunar effect is stronger for stocks that are held mostly by individuals. This finding is consistent with the notion that lunar phases affect individual moods, which in turn affect investment behavior."

For simplicity's sake, the study divided the month into two lunar phases 1) the 15 days consisting of the seven days before a full moon, the full moon day itself, and the seven days to follow, and 2) the same window for the new moon. They not only found that investors were more bullish during the second of these two timeframes, but that the anomaly becomes more pronounced the closer you get to the full moon or the new moon itself.

Also, according to the research, the lunar effect operates independently of all the other calendar effects, including those for lunar holidays.

The researchers, to be fair, offer the following disclaimer: "It is also important to recognize the possibility that the relation between lunar phases and stock returns could be spurious. As many researchers study the patterns of historical stock returns, some will find significant results simply due to chance."