State of the Stock Market Analysis for the Week Ending April 30th, 2017 (Bulls Let Down By GDP Number 4-30-17)
Despite the blowout numbers from Amazon (AMZN) and Google/Alphabet (GOOG, GOOGL) that we saw Thursday after the closing bell, the stock market experienced a lackluster day to close out the week. It was a great week early on, and tech bulls were especially excited to see the Nasdaq pop above 6,000 and hold above that level to close out the week. Earnings were decent this week beyond just Amazon and Google, with strong showings from the likes of McDonald’s (MCD) and Caterpillar (CAT) helping set the tone for a week that saw the Dow rise 1.9%, the Nasdaq gain 2.3% and the S&P 500 add 1.5%.
What was the big “curve ball” was Friday’s first-quarter GDP number that came in at a disappointing 0.7% versus expectations that had been 1.0%, but were lowered to 0.8%. The fourth-quarter final number was 2.4%, so it was sort of surprising to see the dismal 0.7% first quarter sort of “sneak in” at the last minute on the last day of the month. Sub-1% is not exactly the type of number that gives a “thumbs up” to a stock market with the Nasdaq at an all-time high, and the Dow and S&P 500 within proximity of their all-time highs.
So what exactly does this flimsy GDP number mean? This is a tough question, because GDP represents the entire economy, not just Google and Amazon. We have had a very strong performance in housing lately, and new housing numbers, existing sales, and year-over-year price increases have been very strong. Employment numbers have also been pretty good, so it is sort of a mystery as to why GDP numbers have been falling. Bulls were hoping that a strong Q1 GDP number would validate the recent gains in the stock market, but 0.7% was a big letdown for the bullish camp.
There is a lot of buzz right now about President Trump’s first “100-Days” report card, and (politics aside) if we just look at the numbers, the stock market has done pretty well. Since election day in November, the Dow is up 14.2%, the Nasdaq is up 16.5%, and the S&P 500 is up 11.6%. Talk of tax cuts, deregulation, and infrastructure spending boosted the stock market earlier this year, but even though this legislation was delayed, the stock market is still holding up with the major indices near all-time highs. The big worry is what happens when we factor in a 0.7% GDP growth rate.
This low-growth scenario puts the Federal Reserve in a very tough position. How can Janet Yellen and the Fed justify two more interest rate hikes in 2017, when growth seems to be slowing down. The yield on the 10-year U.S. Treasury closed on Friday at 2.28%, and while that might have resulted from global money seeking safety, it also shows that maybe the U.S. economy is not as strong as we think. The low, longer-term rates are definitely helping the housing market. Since most new loans are based on longer-term rates, it helps explain why housing is still so strong. Low interest rates never hurt home buyers, so we will continue to monitor the housing sector.
We get the government employment report for April out next Friday, and economists are looking for 190,000 new jobs versus the 98,000 we saw for March. This is an important report, mainly because March was such a letdown, and another weak number would reinforce the weak GDP number we saw yesterday. That is not the scenario that bulls want to see right now, but maybe we will see a bounce in new jobs for April that will clear the air for the stock market to resume its upward trend. Earnings are also key for next week, so we will remain cautiously optimistic as we head into May.
Global tensions will be on the docket next week, and between North Korea, Syria, Russia, and China, it is clear that these events might be weighing on global financial markets. Let’s hope calm and peaceful heads prevail. That said, the Gorilla wishes each and all a relaxing final weekend of April. Have a great weekend!
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