The Weak Economy Threatens the Bull Market
Apr 26th 2013 11:00AM
Updated Apr 26th 2013 12:05PM
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.
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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.
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