[Chart courtesy of MarketWatch.com]
U.S. stocks rallied for a second day on Wednesday, recouping some recent losses as slower-than-forecast economic growth fueled speculation the Federal Reserve will maintain stimulus. The Dow Jones Industrial Average rose 150 points (1.0%) to 14,910, the Standard & Poor’s 500 Index added 15 points (1.0%) to 1,603, while the Nasdaq Composite gained 28 points (0.8%) to 3,376.
Equities began the session on an upbeat note despite today’s disappointing economic news, which indicated first quarter real GDP growth was revised sharply lower to a 1.8% annual rate from 2.4% in the previous estimates, below the consensus for an unchanged reading. The large decline in today’s report caught all economists by surprise.
The biggest contributors to the downward revision were real personal consumption expenditures (PCE) and nonresidential structures. PCE was revised down to a 2.6% annual rate from 3.4% in the previous estimate, reducing its contribution to GDP growth to 1.83 percentage points from 2.40. It was still the fastest PCE growth in two years; however, when considering that about 70% of GDP comes from consumer spending, this does not bode well for future growth.
On inflation, the GDP Price Index came in slightly hotter than expected at a 1.2% rise, from the 1.1% increase reported in May’s revision. Meanwhile, mortgage refinance applications fell 5.2% last week, its sixth decline in the past seven weeks, reaching its lowest level since November 2011.
Treasuries and the U.S. dollar marched higher following the weak GDP data, while gold fell to its lowest level in nearly three years where the Bloomberg gold spot price got hammered $47.20 to $1,227.90 per ounce; and crude oil inched higher to $95.40 per barrel.
The Treasury benchmark 10-yr yield ended lower by seven basis points at 2.542%. Stocks received the news in stride as sluggish growth suggests the Federal Reserve is less likely to withdraw its support from the markets, so the Fed’s “taper” talk may be off for a while.
All 10 of the S&P 500 industry sectors advanced, with healthcare and utilities leading the way. The health care space rose 1.5% as biotechnology rallied, while utilities settled higher by 1.3% as today’s gain allowed the rate-sensitive sector to erase its June loss and join the telecom space in positive territory for the month.
Elsewhere, the discretionary sector climbed 1.3% as most components rebounded from recent weakness. Also of note, the industrial sector received a boost from transportation-related names while precious metals endured another rough session.
The last two days of buying show some believe the market has overreacted since it sold off after the Fed’s comments, especially in view of today’s weak GDP number. On the other hand, this could be just a dead cat bounce, so we need to watch our sell stops in case this rebound turns out to be ephemeral.
Our Trend Tracking Indexes (TTIs) edged higher with the Domestic TTI ending the day at +0.64% while the International TTI closed at +2.52%.