Stocks are up big on the GDP report, which I will get into in a minute, but before I do, let me say the prediction I made earlier this month that we will see a major stock market bottom in January, I believe, is going to come true.
I know stocks are presumably rising today because of a feeling that the weak data are going to slow any anticipated Fed rate increases this year; however, this should not be investors' focus. Surely you can believe that if you want, but I still think we are in for several rate increases, and that won't be a bad thing for the economy and stocks. Buying for the simple reason that the Fed may be "on hold" is silly and speaks to a shallow understanding of what drives corporate earnings.
With regard to the GDP report, which was a weak 0.7%, it's easy to look at this number and believe things are quite gloomy; however, there's a risk that it overstates the economy's weakness.
Let me explain.
The weakness in GDP came from inventory drawdown ($17 billion) as well as higher imports ($20 billion). I am not worried about either of these things simply because the drawdown in inventories in the fourth quarter means that at some point they will have to be built up again: Shelves have to be restocked, etc. Furthermore, the rise in imports (remember, imports are a subtraction from GDP) just indicates that demand here in the U.S. is still relatively robust, and what's wrong with that?
As for the collapse in capex in the energy sector that we were suppose to see, fixed investment in structures and equipment was down by a combined $11 billion, which is hardly a figure that spells disaster, although I admit it probably doesn't reflect the entire impact of what's going on in the oil patch. The important thing to remember, however, is that it doesn't appear to justify all the panic we have been seeing.
Given these data, there are two takeaways. The first is that despite a complete collapse in the energy economy, which many feared would doom the general economy, we still had positive GDP growth in the fourth quarter. In other words, the economy is a lot more resilient than people think.
Secondly, the strong demand for imports -- and, may I add, the $60 billion increase in personal consumption expenditures in the fourth quarter -- shows that the loss of income and savings by the energy sector is indeed being transferred into gains to consumers, who are going out and spending those savings. By the way, one other piece of evidence to support that view is the fact that MasterCard (MA) reported that purchase volumes were up sharply. (MasterCard is part of TheStreet's Trifecta Stocks portfolio.)
All of this should make you bullish, but it doesn't end there. It gets even better. That's because we are now entering the most powerful fiscal month of the year. February sees a mountain of tax refunds injected into the economy. The figures can run close to $500 billion in a single month. While not all the money is spent, much of it is and that is why we typically see the market strong in February and that strength very often continues all the way to May.
It's all about that fiscal "pump," which is what I watch and the thing that I constantly talk about here. I am happy that many people don't look at this, or that they discount it or brand it "negative" because of some personal ideology that has nothing to do with facts, but it really is a major factor in what drives the global economy and the markets.
