Stocks finally hit a new all-time high on Thursday after
dancing around that level for days. But I wouldn't read too much
into this "breakout," as the fundamental question lurking has yet
to be answered. The question pertains to whether the recent run
of soft economic data has solely been due to the rough weather or
if something fundamental is at work.
I agree with the consensus view that weather is the bigger
culprit here, but I don't entirely dismiss the contrary view
either. This morning's negative Q4 GDP revision shows that
something other than frigid temperatures at play in the economy,
and that sustainability of economic growth can't be taken for
The economy's +4.1% in Q3 and +2.4% in the following quarter
highlights this point. Today's negative revision wasn't
unexpected, though the mix of revisions was a bit surprising.
Consumer spending was revised down from +3.3% to +2.6%, with
all components like durables, non-durables and services losing
ground. Government spending also turned out to be weaker than
originally expected, down -5.6% instead of the originally
reported -4.9%. On the positive side, investments showed positive
revisions, with investments in equipment revised up to +10.6%
from +6.9%, structures to +7.3% from +3.8% and residential fixed
investments falling less than originally estimated.
The GDP report follows soft readings on the housing, factory
and consumer sectors in recent weeks. But the hope remains that
the economy's fundamentals remain strong and growth will resume
once the skies clear up.
The problem is that we won't get "clean" data for at least
another month as next week's top-tier manufacturing ISM, consumer
spending and labor market (non-farm payrolls & ADP) will
continue to show weather-centric distortions. And until we get
this clarity about the economic picture, it may not be possible
for the market to make a sustainable breakout.
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