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 granted.
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.