Major Moves

The government shutdown that lasted from Dec. 22, 2018, to Jan. 25, 2019 – the longest is U.S. history – is still having an impact on the financial markets at the end of February. The impact was felt today as the Bureau of Economic Analysis (BEA) was finally able to release the United States' gross domestic product (GDP) numbers for Q4 2018 … a full month behind schedule.

During a typical quarter, the BEA will release the following three GDP estimates:

  • The advance estimate: one month after the end of the previous quarter
  • The preliminary estimate: two months after the end of the previous quarter
  • The final estimate: three months after the end of the previous quarter

However, this quarter is different because the federal government was shut down during most of January. Since the BEA staff did not have a chance to compile the Q4 2018 data during January, the agency decided to wait a month, gather the data and combine the advance estimate with the preliminary estimate.

This delay gave traders and analysts an additional month to stew and wonder what the number was going to be. While virtually everyone anticipated that GDP was going to continue contracting from the 4.2% growth rate the economy experienced during Q2 and the 3.4% growth rate it experienced in Q3, many thought it was going to contract more than it did.

The consensus estimate for Q4 was hovering right around 2.2%, but the U.S. economy surprised to the upside with a 2.6% growth rate. When you combine this strong Q4 number with the rest of 2018, you see that the U.S. economy had its best year since 2005, before the Great Recession of 2009.

Even if economic growth were to slow down a little in 2019, we would still likely have enough growth to continue fueling much of the bullish momentum that exists on Wall Street.

Chart showing percent change in gross domestic product (GDP)

S&P 500

Interestingly, while many other financial assets reacted to the surprising Q4 2018 GDP news this morning, the S&P 500 seems to have shrugged it off. The stock index barely moved at all – closing only 0.28% lower today, at 2,784.49 – as traders dug a little deeper into the GDP numbers and discovered that consumer spending slowed down in Q4.

Consumer spending is an important economic indicator on Wall Street, especially for consumer discretionary stocks. The news of a slowdown in spending wasn't enough to send traders running for the hills, but it did give them pause.

The Consumer Discretionary Select Sector SPDR ETF (XLY) pulled back 0.54% today. I'll be watching these consumer discretionary stocks to see what they do during the next few weeks. If they start to sell off, the S&P 500 is not likely to break through resistance at 2,816.94.

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Performance of the S&P 500 Index

Risk Indicators – TNX

One asset class that did react strongly to the GDP announcement was Treasuries. Stronger-than-expected growth numbers caused bond traders to worry that they hadn't priced in enough risk premium in the Treasury purchase as of late.

When economic growth is strong, inflationary pressures tend to increase. When these pressures increase, it escalates the risk that the Federal Reserve will need to take action to curb excessive inflation by raising interest rates. This typically causes traders to push longer-term Treasury yields higher by pushing Treasury prices lower, like we saw today.

The 10-year Treasury yield (TNX) broke convincingly out of the consolidation range it has been in since mid-January today as the indicator broke above its downtrending resistance level. This breakout confirms the formation of a bullish wedge reversal pattern and clears the way for the TNX to climb back up toward its recent highs of 2.8%.

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10-year Treasury yield (TNX)

Bottom Line: Watching the 3% Level

While the TNX is still well below the magical 3% level market analysts have been watching for years, seeing an increase in the TNX is likely to apply some bearish pressure to the stock market as strong dividend-paying stocks may lose some of their attractiveness compared to rising Treasury yields.

It's only likely to apply a modest amount of bearish pressure at the moment, but it will be worth watching as we head into March.

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