04/30/14   Q1 GDP Could Go Negative After Revision

Editor’s Corner

Ron Rowland

The nation’s real gross domestic product (“GDP”) slowed to a crawl during the first quarter.  Today’s “advance” estimate from the Bureau of Economic Analysis (“BEA”) showed the economy increasing at an annual rate of just 0.1% in the first three months of 2014.  As always, this first report is subject to revisions, the first of which is scheduled for May 29.  It won’t take much of a downward revision to turn this economic growth into contraction.  According to the BEA, the average absolute change between the advance estimate and final figure is 1.3%.  The +0.1% could potentially become -1.2%, while remaining just an average revision.

The +0.1% figure for the first quarter is a sharp drop from the 2.6% growth rate of the prior quarter and well below the 1.1% consensus growth forecast.  Personal consumption expenditures and reduced imports played constructive roles in the small increase.  Negative contributions were registered by nearly every other component including exports, fixed investments, inventories, and government spending.  Although the weather provides a convenient excuse, economists point to the drop in exports as the primary cause of sluggish growth.  In turn, the export decline was due to poor demand in Europe and Asia.

Meanwhile, in another part of the country, the Federal Reserve was concluding its April meeting today.  Its post-meeting statement included the following, “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.”  It then went on to say it would taper asset purchases by another $10 billion per month in May.  The new monthly rate of $45 billion consists of $20 billion in mortgage-backed securities and $25 billion in long-term Treasury securities.

Additionally, the Fed claims it has received additional data since its March meeting and the data is not consistent with the GDP figure released earlier in the day.  The Fed believes “growth in economic activity has picked up recently.”  It acknowledged the sharp slowdown during the winter months, with weather playing a role.  Labor market indicators continue to improve, but the Fed believes the unemployment rate remains uncomfortably high.

Markets reacted positively to today’s news events, although not in dramatic fashion.  The S&P 500 started the day to the downside and ended with a small gain.  Bonds spent nearly all day in positive territory, with the usual bout of volatility coinciding with the release of the FOMC statement.

Investor Heat Map: 4/30/14


Utilities grabbed the top spot back from Energy after relinquishing it for just one week.  Both the yield and defensive nature of Utilities is appealing to investors at this time.  Energy didn’t fall far.  It is now in second place, although the gap between it and Utilities is almost nonexistent.  Real Estate and Consumer Staples held their ground in the third and fourth spots.  Despite a loss of momentum, Industrials climbed two spots to fifth, putting it slightly ahead of Materials.  Telecom fell four ranking positions, and now Financials, Technology, Telecom, and Health Care are barely in the green and vulnerable to any further weakness.  Consumer Discretionary has been at the bottom for six weeks and is not showing any signs of improvement.


There is little change in the style rankings this week.  Large Cap Value is in its second week at the top after a dramatic climb from next-to-last place.  Mega Cap continues to improve and climbed another spot to second.  Mid Cap Value backed off to third place, giving Mega Cap an easier path to second.  Large Cap Blend and Mid Cap Blend held their spots in fourth and fifth.  Large Cap Growth and Small Cap Value swapped positions.  Typically, that would not be very significant, but this week it also involves Small Cap Value flipping over to a negative trend.  The categories in the upper half of the style rankings maintained their momentum, but the lower-ranked categories are a different story.  Mid Cap Growth also flipped to the negative side along with Small Cap Value.  The bottom three categories of Small Cap Blend, Micro Cap, and Small Cap Growth all fell deeper into the red.


Latin America has remained consistent the past few weeks by moving mostly sideways while keeping its top-ranked status.  It remains mired in its three-year downward trending channel, and so far, nothing distinguishes this latest rally attempt from the half-dozen others that failed.  Pacific ex-Japan keeps its second place ranking as oil and other commodity prices firm.  Canada climbed two spots to third.  Like Pacific ex-Japan, Canada is rich in resources and typically benefits when commodities are performing well.  The U.K. jumped three places to fourth, aided by its strengthening currency.  Emerging Markets tumbled from third to sixth, and EAFE eased off a spot to seventh.  World Equity and the U.S. showed little change this week.  China weakened again, this time pushing it into the red.  Japan holds last place for now, but China could soon replace it.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“Not a great start to the year.”

Lindsey Piegza, chief economist at Sterne Agee, 4/30/14


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