How Investors Should Prepare for Thursday's GDP Report

October 27, 2009

Wall Street is on pins and needles this week in anticipation of the GDP report that will be issued this Thursday morning at 8:30 am ET. Traders all around the world will be glued to their monitors to see what the government report has to say.

The reason why this report is so important is because it’s the first official report on how well the economy did during the third quarter. This report is especially important because it’s very likely to show that the recession finally ended this summer.

Make no mistake—this report will have a major impact on stock prices and could shape the entire investing environment for the rest of the year and beyond. Consider that the last four GDP reports have shown negative growth, meaning the economy has been getting smaller for over a year. In real terms, the economy produced as much during the second quarter of 2009 as it did for the second quarter of 2006—three years of zero growth. If this report finally shows some growth, this will be cause for a celebration.

Now let’s take a step back and examine the numbers a little closer. According to professional economists, they’re expecting the report to show growth of 3.5% (this is after inflation). I can’t say I’m too concerned about what professional economists think. Most of these guys never saw the recession coming so I’m not too hopeful they’ll nail down when it will end. Still, investing is an expectations game, and we need to know what the crowd thinks.

The Numbers Behind the GDP Report

Here’s what the media isn’t saying about the GDP report. Thursday’s report is really just the first report—or flash estimate—for third-quarter GDP. Even though it will get lots of attention, the government will revise the report again in late November and again in late December. Even after that, Uncle Sam may do further revising down the road. That’s why the initial report should be greeted with some skepticism.

What also isn’t being said is that this flash estimate will not include the trade figures from September. Let me repeat that: Thursday’s GDP will not include trade figures for the final month of the third quarter. That’s a pretty big omission, and it’s especially important because the weak dollar is largely what’s driving this economy. The weak dollar specifically helps the export sector of the economy. Bear in mind that the global trade imbalances have actually settled down due to the recession. But guess what? These imbalances are going to soar thanks to the recovery.

If the GDP report is higher than expected (over 3.5%), then the U.S. dollar may rally and long-term yields would rise. Most of Wall Street may get fooled but I don’t want you to get fooled. Until those trade figures come out, the right way to beat on the U.S. dollar is AGAINST, and that’s how we base our investment strategy (more on that in a bit).

If the GDP report comes in lower than expected (under 3.5%), then you can expect the dollar to continue its free fall. During the third quarter, inventories were reduced in a big way so that will probably take about 1% off GDP growth. Not to worry, though, because building up inventory is a good sign for future economic growth. Future reports will certainly show this.

Get Your Portfolio Ready for Thursday’s Report

In Washington, there’s talk of another stimulus program, but in my opinion, nothing is going to happen until the healthcare debate is out of the way. On top of that, the Federal Reserve meets next week, and I expect them to keeps rates low. The good news is that last week’s Beige Book report from the Fed showed that the economy is improving, although consumer spending is still rather weak.

I’m not going to take a guess at what Thursday’s report will say. Instead, I’m going to focus on strategies that will benefit either way. That’s why I like shares of SXC Health Solutions (SXCI).

The company is a developer of information management software applications. It offers cutting-edge benefit management software (and related services) to businesses and the government. This is an emerging field, and SXCI is at the forefront of the industry. What I like about the business model is that it’s not tied to the currency market. No matter which way the dollar goes, SXCI will do well. During the past four quarters, the company’s sales rose 41% to $320.8 million. As Wall Street places a priority on sales growth, SXC Health shares will be in high demand.

The company is due to report earnings again on November 5, and I’m expecting great results. Wall Street currently expects earnings to double, and I think they can do even better. Last earnings season, the company doubled the Street’s expectations. Best of all, the company is poised to prosper no matter what the dollar does.

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