Today brought the release of 4th quarter GDP, which came in at 3.2%. The headline number was below expectations for 3.5% growth, but let’s not get crazy here, as this number was pretty close, and will be revised two more times before it becomes official. Within the report, personal consumption was a notable positive, and it exceeded expectations with a 4.4% gain versus the estimate of 4%. I don’t think anyone around these parts will take issue with GDP in the 3% range, since that should be strong enough to help the labor market marginally improve, while not so strong that it would cause the Federal Reserve to consider tightening monetary policy.
But what is Mr. Market doing on this number? Well, it’s selling off handily at the moment. One thing to remember when assessing these GDP reports is that the data is clearly looking in the rearview mirror. We have been encouraged with the state of the U.S. economy in recent months, and we’re not expecting a sudden change for the worse over the next few quarters. But we have also been worried about the complacency building in markets. Lately the U.S. stock market has continued to rally, but we’re noticing potential warning signs coming in the form of technical divergences and the recent poor relative performance of a number of risk assets versus the broad market (small caps vs. large caps, emerging markets vs. U.S., silver/gold ratio, etc).
The monetary policy differences in China (raising rates) also create the potential for slower exports (which happens to be a big positive contributor in today’s GDP) on the back of slower international growth. Often times markets buy the rumor and sell the news. I wonder if this GDP number doesn’t represent a typical “sell the news” event. If so, a healthy correction in stocks would not only clear some of the weak hands in the market, but could set up a healthier environment to reposition for the possibility of another move higher in this bull market.
