The Weak Economy Threatens the Bull Market

This morning's news that the U.S. economy grew at just a 2.5% rate during the first quarter of 2013 came as an unwelcome reminder that economic growth has been hard to come by lately. With many economies around the world experiencing slowing growth or outright recessionary conditions, an increase in U.S. GDP that fell well short of what economists had expected to see confirmed that the U.S. hasn't been immune from the global malaise. Yet the Dow Jones Industrials took the news in stride, gaining ground early in the session to gain 12 points as of 10:30 a.m. EDT.

To understand the market's minimal reaction, you have to consider several things. First, the GDP figures released today were merely the first estimate of the nation's economic growth and will be revised two more times before they're finalized. In the fourth quarter of 2012, initial estimates of a decline in GDP were later reversed higher. In addition, investors have actually tended to like relatively weak figures on the economic front because they believe weakness forces the Federal Reserve to maintain its accommodative monetary policies a while longer. And finally, given that the figures are backward-looking, more important forward indicators like the better-than-expected consumer sentiment data released this morning point toward the potential for future gains from the consumer sector.

Still, there's only so long that the stock market can rise without the fundamentals of economic growth helping push it up further. So far, companies have done a great job becoming more efficient, cutting costs, and expanding profit margins. But Caterpillar , Alcoa , and other companies that are most sensitive to economic growth have seen their share prices perform weakly so far this year, signaling concerns about the contribution that industrial activity will play in an eventual rebound.


As earnings season continues, investors need to focus on how well different sectors of the economy perform. So far, the recent stampede toward consumer-oriented stocks Procter & Gamble and Johnson & Johnson indicate most investors' defensive posture, with those stocks seeing their valuations rise substantially. Yet even they may not provide complete protection from the end of the bull market if the economy can't strengthen in the years to come.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand-new report. Just click here to access it now.

The article The Weak Economy Threatens the Bull Market originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends and owns shares of Johnson & Johnson. It also recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Bonds for Beginners

Learn about fixed income investments.

View Course »

Reading a Stock Quote

Learn to read the ingredients of a stock.

View Course »

Add a Comment

*0 / 3000 Character Maximum

2 Comments

Filter by:
Gumby

Dan ALCOA should benefit from very strong demand already ongoing for past several years, but worldwide supply continue to outstrip demand with recently built new smelters chiefly in China. Worldwide production had grown rapidly from just over 30 millons to close to 45 millon tons in past several years. Imagine how fast the supply grew if you look at the entire history of aluminium industry. 50% growth in past decade against over 125 years of existence since aluminium was first invented by the founder of ALCOA back inthe 1880\'s. Demand is already growing at 2.5 millon annual clip. By the end of this decade, we will be demanding close to 70 millon tons. There can only be so much electricity to be found to power more new smelters. Will we be able to produce enough to meet the demand at end of this decade as projected? Will China continue to build new smelters every year or what? China just added 4 millon tons this year but shut down only 700,000 tons at old inefficient smelters. It is not the question about sensitivity to economic growth for ALCOA, we are swamped with too much aluminium at all costs. Many smelters especially older ones are losing money but continue to produce to preserve jobs. Is $1 a pound really appropriate for aluminum? All other metals had gone up in prices already. It is like placing a pillow on the face of ALCOA in effort to suffocate it. It is a very strange story, indeed!

April 26 2013 at 1:34 PM Report abuse rate up rate down Reply
Gumby

Dan

April 26 2013 at 1:22 PM Report abuse rate up rate down Reply