Two economic announcements this week have the power to move stocks. And right now the consensus among economists is moving toward a belief in better than projected numbers.
The big number comes on Friday, October 29, with the first estimate of third quarter GDP. Economists surveyed by Bloomberg project 2% growth from the third quarter of 2009. That would be a significant gain from the 1.7% annual growth rate in the second quarter.
That kind of increase in economic growth would be a confidence builder for investors at a time when so many are expecting growth to slump until the middle of 2011. I don’t think it would be enough to change the Federal Reserve’s decision on the need for a new program of quantitative easing to support economic growth by driving down medium- and long-term interest rates. For one thing, a 2% growth rate isn’t enough to significantly lower the number of unemployed. But I do think an increase to 2% would diminish remove worries about a double-dip recession.
The Bloomberg survey of economists also shows them projecting that the improved growth rate is coming from a pickup in consumer spending. Economists project that consumer spending grew by a 2.4% annual rate in the third quarter. The National Retail Federation has forecast that November- December sales will rise by 2.3 percent from sales during the same period in 2009. That would make 2010 the best holiday shopping season in four years.
Investors will get a preview of Friday’s third quarter GDP numbers on Wednesday, October 27 when the U.S. Department of Commerce reports durable goods orders. According to economists, durable goods orders climbed 2% in September. That would be the most in five months.
Take a look below the headline number to a subcategory, orders of business capital goods. This part of the durables number measures equipment that business is ordering to expand or modernize production. Orders in this category grew by 4.1% in August and economists are looking for a similar pickup in September.
Businesses don’t invest unless they think that the economy is revving up. They can be wrong, of course, but business investment is generally a reliable indicator of economic direction.
Positive numbers from GDP and durables would be a good reason for the current rally to continue into the fourth quarter of 2010.
I think the market sells of going into the weekend. Better the economic reports, more apprehensive the market gets about the goodies promised by the Fed. Weak dollar and strong commodities also takes a hit. So do the multinationals. All in all, sell before the Fed talks next week will be the guiding light.
I am surprised that CMI is not listed among the stocks in your new mutual fund. I have a 30% profit since you recommended it in late April and still expect it to hit the target price you set on 9/27 of $114 by 7/11.
Jim, also off topic, but Middleby has been on a real good run and starting to look pricey to me… do you think the growth potential is worth a p/e of 21 right now? I know it does fit with your theory of owning stocks that sell to companies.
I’d say that when a company reports a 140% increase in earnings, a sell off by the momentum folks is to be expected. I’d think of this as an opportunity.
Jim,
Off-topic but Cummins (CMI) is down almost 6% today after profit and revenue both missed estimates. Is the selloff justified? Or a good entry point for the stock? Thanks.