The first report card of the year for the American economy is due on Friday. Hold tight.
Investors will be watching closely after worries about a global and US economic slowdown weighed on their minds at the start of the year.
The Federal Reserve Bank of Atlanta estimates 2.8% real GDP growth in January through March, while analysts polled by Refinitiv forecast an average of 1.9%. A weaker than expected GDP reading could pull stocks and other assets lower.
GDP news comes with earnings season is in full bloom for tech stocks, and this week’s results will include Twitter, Facebook and Amazon.
Tesla will also report results, and the company is again in focus over its supply constraints and sales slump.
Earlier this month, Tesla reported a massive drop in sales for the first quarter. The earnings report will show how the annual target for deliveries will be affected. So far, the company has not changed its guidance of 360,000 to 400,000 vehicles for the year.
For Amazon, there could be increased focus on Amazon Prime given Disney’s venture into the streaming realm with the announcement of Disney+, as well as Apple’s new streaming service.
Government stimulus, like tax reform, boosted the economy last year, but that’s now petering out. The US economy is widely expected to grow at a slower speed in 2019 than last year’s 2.6%.
First quarter growth tends to be weaker due to seasonal factors. This year, the data will also reflect the partial government government shutdown, the longest in US history, which started in December but went on for much of January.
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But Friday’s GDP number is only the first of three, and revisions are common, so any initial reaction could be short-lived.
“Slowing down is fine, as long as there is no recession,” said Brent Schutte, chief investment strategist at Northwestern Mutual.
The more than 4% annualized growth figure the United States reported for the second quarter of 2018 was certainly outside the trend. GDP slowing to what many economists say is a more sustainable level will keep inflation around 2%, the Federal Reserve’s target, and will prolong the economic growth cycle, Schutte said. On the back of that, fears of an impending recession are letting up, he added.
There are other positive signs. The US trade deficit narrowed by more than expected to $49.4 billion in February, its best reading in more than 18 months, data showed last Wednesday. And this bodes well for Friday’s GDP number.
As market expectations for economic growth look up again, stocks in cyclical sectors like construction and manufacturing should outperform those in defensive industries like healthcare.
The next driver to lead stocks across the board higher will be global growth, Schutte said.
Just a few months ago, analysts promised doom and gloom for the world economy. But if last week’s better-than-expected Chinese GDP data is any indication, those worries may have been overdone. China economic stimulus seems to be working, alleviating global concerns for now, although worries over the health of Europe’s economy remain.
