MarketView for January 30

 

 

Summary

 

The S&P 500 scored its largest gain in more than a month on Thursday as Facebook led a tech rally and the latest GDP report indicated that the economy was on solid footing in the fourth quarter. The day's rebound pushed the S&P 500 back into positive territory for the week, but the index was still down 2.9 percent for the month.

 

Facebook ended the day up 14.1 percent to close at $61.08, reaching a record high of $62.50 during the session, while at the same time supporting both the S&P 500 and Nasdaq. The social media company delivered its strongest revenue growth in two years on Wednesday, exceeding Street estimates.

 

Google closed up 2.6 percent to $1,135.39, a day after Lenovo Group said it would acquire Google's Motorola handset division for $2.91 billion. After the closing bell, Google's shares extended gains by 2.2 percent when the company reported results.

 

The S&P 500 tech sector index was up 1.5 percent making it one of the day's best-performing sectors, though all 10 sector indexes ended the day higher.

 

Adding to support, the Commerce Department reported that our gross domestic product grew at an annual rate of 3.2 percent in the fourth quarter. Strong household spending and robust exports supported the growth.

 

However, there is concern on the Street that the efforts by central banks in the emerging economies to stabilize their currencies may not be enough to staunch an exodus of funds from those markets.

 

Shares of Qualcomm chalked up a gain of 3 percent, closing at $73.26, a day after the company reported results. Qualcomm raised its full-year earnings outlook.

 

Among other gainers, Visa closed up 1.7 percent at $220.88 after reporting a 9 percent increase in quarterly earnings.

 

The day's economic data also pointed out that the number of Americans filing new claims for unemployment benefits rose more than expected last week, but the underlying trend suggested the labor market was continuing to improve.

 

The demand for large-cap stocks in 2014 over small caps is gaining momentum due to the small cap sector's high valuation and the impact of increased market volatility as the Fed continues to taper its stimulus efforts.

 

GDP Surprises

 

The Commerce Department reported Thursday morning that strong household spending and robust exports kept the economy on solid ground during the fourth quarter. Specifically, gross domestic product grew at a 3.2 percent annual rate in the final three months of last year, the Department said. However, stagnant wages could chip away some of the momentum in early 2014

 

While that was a slowdown from the third-quarter's 4.1 percent pace, it was a far stronger performance than had been anticipated earlier in the quarter. Early in the quarter the expectation was for a growth rate of below 2 percent given that an inventory surge accounted for much of the increase in the July-September period.

 

Now taking both quarters together, growth came in at a 3.7 percent pace, up sharply from 1.8 percent in the first six months of the year. It was the largest half-year gain since the second half of 2003.

 

Consumer spending was the main driver of fourth-quarter growth, but there was also a strong boost from trade. Business investment also lent support as did the restocking of warehouses, but not at the same scale as in the third quarter.

 

The report was released a day after the Federal Reserve announced another reduction to its monthly bond purchases and shrugged off a surprisingly sharp slowdown in job growth in December.

 

Consumer spending rose at a 3.3 percent rate, the strongest since the fourth quarter of 2010. Consumer spending, which accounts for more than two-thirds of all economic activity, advanced at a 2 percent pace in the third quarter.

 

Inventories increased by $127.2 billion, the most since the first quarter of 1998. That added 0.42 percentage point to GDP growth. Inventories had been up $115.7 billion in the third quarter, contributing 1.67 percentage points to output.

 

Excluding inventories, the economy grew at a 2.8 percent rate, up from the third-quarter's 2.5 percent rate. The increase in demand should put the economy on a stronger growth path this year. However, anemic wage growth could take some edge off consumer spending early in the year.

 

The question now is whether the current level of inventories is unsustainable and should we expect a correction beginning in the first quarter. In addition, business investment could slow down after a surprise drop in orders for capital goods excluding defense and aircraft during December. The strong performance from trade is also unlikely to be repeated as slowing growth in China is expected to curb exports, while firming domestic demand will suck in imports.

 

Nonetheless, the decrease in fiscal austerity of last year should keep the economy on a firmer growth path this year. At the same time, the abundance of workers looking for jobs has restrained wage growth. In a separate report, the Labor Department said new applications for state unemployment benefits rose 19,000 last week to 348,000.

 

Consumption in the fourth quarter came at the expense of saving. The saving rate slowed to 4.3 percent in the fourth quarter from 4.9 percent in the prior period.

 

Income at the disposal of households after accounting for inflation rose at a tepid 0.8 percent rate. That was a sharp slowdown from the 3.0 percent pace in the third quarter.

 

Sluggish wages kept inflation pressures benign. A price index in the GDP report rose at a 0.7 percent rate, decelerating from the third-quarter's 1.9 percent pace. A core measure that strips out food and energy costs increased at a 1.1 percent rate after advancing at a 1.4 percent pace in the July-September period.

 

Exports rose at their fastest pace in three years. That combined with declining petroleum imports to narrow the trade deficit. Trade contributed 1.33 percentage points to GDP growth.

 

Business spending on equipment accelerated at a 6.9 percent rate in the fourth quarter after rising at only a 0.2 percent pace in the prior three months. But here was a decline in business spending on nonresidential structures.

 

A run-up in mortgage rates, which held back home sales and renovations, saw residential investment falling for the first time since the third quarter of 2010. Home sales have been on the back foot in recent months and that trend is likely to persist for a while as the market adjusts to higher loan rates. A third report showed contracts to buy previously owned homes fell 8.7 percent in December to a two-year low.

 

Government spending contracted at a 4.9 percent pace, reflecting the 16-day partial shutdown of the federal government in October and a plunge in defense spending. The Commerce Department said the shutdown sliced 0.3 percentage point off of GDP growth through reduced hours worked by federal employees.

 

Unemployment Claims Increase

 

The Labor Department reported Thursday morning that the number of new claims for unemployment benefits rose more than expected last week, but the underlying trend suggested the labor market continued to heal. According to the Department, initial claims increased by 19,000 claims to a seasonally adjusted 348,000 claims. Claims for the prior week were revised to show 3,000 more applications received than previously reported.

 

The four-week moving average for new claims, considered a better measure of underlying labor market conditions as it irons out week-to-week volatility, edged up 750 claims to 333,000 claims.

 

A Labor Department analyst said claims for Louisiana were estimated because of inclement weather, adding there were no special factors affecting the state level data. Last week's claims data include the Martin Luther King Jr Day and filings tend to be volatile around federal holidays.

 

Job growth slowed sharply in December, yet the surprise increase in payrolls was relatively small, pointing to freezing temperatures that hit sectors such as construction and transportation.

 

Federal Reserve officials also appeared to dismiss the slowdown in payrolls, stating at the close of its two-day policy meeting on Wednesday that the labor market on balance showed further improvement.

 

The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid fell 16,000 to 2.99 million in the week ended January 18.

 

The so-called continuing claims have been elevated in recent weeks and some economist say the cold weather could be preventing many recipients from going out to search for work and companies to delay hiring.