The GDP report doesn’t give stocks enough reason to build on their recent gains. That’s particularly the case after a very strong month for stocks that has pushed the broad indexes into record territory, with even the Nasdaq flirting with the 5K level.
The revised look at Q4 GDP revision lowers the growth rate (+2.2% vs. the +2.6% advanced rate), but not to the sub-2% level that some in the market were expecting. Please note that the consensus range for the revised Q4 GDP estimate was from +1.7% to +2.4%. Another positive (or less negative) aspect of the report is that drivers of the revision aren’t bad. We did get a modest negative revision to consumer spending growth (+4.2% vs. +4.3%) and investments (+5.1% vs. +7.4%), but a big part of the revisions was because investment in inventories was lowered.
The +2.2% growth rate in Q4 provides a relatively subdued bookend to a year where the two middle quarters of the year were unusually strong while the first and last quarters were on the weak side. This brings the full-year 2014 GDP growth rate to +2.4% vs. +2.2% in 2013, with many expecting the growth pace to accelerate this year.
What does this GDP report say about how stocks are (or should) behave? My short answer would be that it’s not friendly to what’s happening to stocks lately. Look, the major indexes have moved back into record territory in recent days despite the fact that the corporate earnings picture has weakened to the extent that pretty much all the growth that was expected this year has effectively evaporated.
And it’s not all because of oil — estimates for sectors outside of oil have been steadily coming down as well. The positive U.S. economic outlook relative to other regions of the world was a source of strength for the market. But recent data seems to suggest a deceleration on that front as well. Perhaps the Fed’s ‘patience’ is totally justified: they understand better than all of us combined that the recovery’s feet are made of clay.
Related:
Steven Ricchiuto: Deflation Part of New Economic World Order
