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Market Update

Economy Taps Brakes. Will Street Do the Same?

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January 30, 2015

If there’s been a key message to pull from this latest earnings round, it’s the cautionary words of CEOs. Even those with sound performances a quarter ago know that conditions look to have softened in the current quarter, the three-month stretch whose final results will hit in a few months. The same can be said of the U.S. economy. We got the broadest measure of growth in a report this morning: GDP. The print wasn’t stellar—growth slowed as expected from a brisk Q3. But some of Q4’s details were better and could allow stocks to salvage what’s been a rough week. Despite the ups and downs, the S&P 500 (SPX) has defended the key 2000 line. Its preservation likely remains a key achievement for the bulls over the short- and medium-term.

FIGURE 1:

The S&P 500 (SPX) preserved 2000 in a snap-back session Thursday. Can it hold? Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

GDP Slows, But Not Consumer? The U.S. economy grew by a 2.6% annual pace in Q4, off the 5% clip of Q3, according to preliminary government data. The Q4 performance is shy of Street expectations for growth a touch north of 3%. Some of the details were rosier. Consumer spending, which is a main source of economic activity, rose 4.3% following a 3.2% rise in Q3. This is the biggest gain since Q1 2006. But growth slowed because of slower business and government spending and higher imports. Now, let’s get a little technical. The personal consumption expenditure (PCE) index fell at a 0.5% annual rate in Q4 compared a 1.2% gain in Q3. Don’t worry if you can’t remember the name, just remember this: it’s the Federal Reserve’s favorite inflation gauge. The drop from Q3 to Q4 is the biggest since Q1 2009 and is likely the low-inflation cover that the Fed says allows it to be slow with interest-rate hikes. The core PCE that excludes food and energy rose at a 1.1% clip, down from 1.4%. CEOs generally have said the business climate needs at least 3%-3.5% GDP growth to keep the expansion going. We’re still smack in the middle of reporting season. Could more warnings be in the works?

Mixed Earnings Bag for Web Giants. In a few words: Google (GOOG, GOOGL) missed. Amazon.com (AMZN) trounced. Trounced, yes, but because they reported a smaller profit decline than the Street expected. And yet, both shares performed well in an otherwise tough week. Is that a bigger sign for the market? Too soon to tell. As for report details, the search giant said its search ad business is maturing, which in this case means slowing down. The e-commerce giant, which has been known to spend, spend, spend, did report a 15% surge in last quarter’s sales. What’s more, Amazon guided for current-quarter sales of $20.9 billion to $22.9 billion, up 6% to 16% from the year-earlier period, compared with the $23.05 billion projected by analysts polled by Thomson Reuters.

Coming Next Week: So we skid out of Fed week only to run smack into the granddaddy of economic reports: next Friday’s December U.S. payrolls and unemployment report. The hiring trend has been up, so details on wage growth and job types become increasingly important. Look, too, for motor vehicle sales out on Tuesday. So, the Q4 GDP reading showed its measure of consumer spending is up. Will car buying confirm that sentiment? Visa (V) in its earnings report this week made special mention of lower gasoline prices boosting consumer charging totals on other sometimes pricier goods. Another earnings report and de facto economic report comes with earnings from package-delivery firm UPS (UPS) on Tuesday. “Brown” already pre-reported (on January 23) disappointing Q4 results and guidance. Let’s see if it has more to say.

Good trading,
JJ
@TDAJJKinahan

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