Saturday 28 January 2006

Economy looking bad, investors feeling good

So US fourth quarter GDP growth came out weak.

The Commerce Department said gross domestic product, the broadest measure of economic activity within U.S. borders, expanded at a weak 1.1 percent annual rate in the October-December period -- little more than a quarter of the third quarter's 4.1 percent rate.

But the US stock market took it well.

The Dow Jones industrial average ended up 97.74 points at 10,907.21 while the high tech-laden Nasdaq composite index added 21.23 points to close at 2,304.23. Strong earnings reports by blue-chip companies Microsoft Corp. and Procter & Gamble Co. stimulated buying.

Date on new homes sales also possibly helped.

A later Commerce Department report showing December new-home sales climbed by 2.9 percent to a 1.269 million unit rate helped perk up financial markets as analysts noted there still was life in the vital housing segment, where rising home prices have helped boost consumers' optimism.

But the housing data were put in perspective by Calculated Risk, whose charts show that new home sales may have peaked both in terms of sales volume and price.

So if the consumer spending outlook is as weak as the GDP and new homes sale data suggest, equity investors must be banking on lower interest rates or an acceleration in capital spending. Both at the same time would be even better. Morgan Stanley's Eric Chaney makes the case "for a long lasting but moderate capex cycle".

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