Barring some type of algorithmic disaster today, the stock market should log another winning week. Entering today's session, the S&P 500 is up 1.9% and the Russell 2000 is up 3.0% in a move that has been led by the market's economically-sensitive sectors.
Those gains haven't been predicated so much on the arrival of good data as they have on the premonition that the arrival of weak data will mean continued central bank support, and perhaps less fiscal austerity, to jumpstart economic growth.
The dichotomy between the real economy and the stock market's alternate reality can be seen in the performance of the stock and bond markets this week. In the midst of the "risk on" rally in stocks, the 10-year note yield of 1.68% is actually down two basis points for the week.
The Great Rotation, then, continues to wait.
Undoubtedly, the reports of weak revenue growth in the first quarter and cautious-sounding guidance have contributed to the Treasury market's resilience since they reflect an environment of relatively weak demand.
The advance estimate for Q1 GDP pretty much reflected the same. Real GDP increase at an annualized rate of 2.5% in the first quarter (Briefing.com consensus +2.8%), aided by a 3.2% increase in personal consumption expenditures and a 12.6% jump in residential investment. While Q1 GDP was up markedly from the meek 0.4% growth rate reported for the fourth quarter, the overall growth wasn't as strong as the headline suggests.
The gain in PCE was admittedly impressive, as it was the biggest increase since the fourth quarter of 2010 and contributed 2.24 percentage points to the change in real GDP. However, a good portion of the change in first quarter GDP was related to the change in private inventories, which accounted for 1.03 percentage points of the change in real GDP.
Back out the change in inventories and real final sales were up just 1.5%, which is the slowest rate of growth since the fourth quarter of 2011.
Government spending was a big drag in the first quarter as it fell 4.1% and subtracted 0.8 percentage points from the change in real GDP. This drag can be expected to get worse as the effects of the sequester continue to increase.
The added disappointment with the Q1 GDP report is the building sense already that Q2 GDP will be even weaker (i.e., under 2.0%) based on reports seen so far.
The futures market has held up reasonably well despite the disappointing growth inferences in the GDP report. Then again, the weak growth should keep the Fed fully engaged with its current policy path -- a thought that always seems to be a source of support.
Currently, the S&P futures are down five points and are trading 0.2% below fair value. The bulk of those losses were in place before the GDP report as earnings reports and/or guidance from the likes of Amazon.com (AMZN), Starbucks (SBUX), KLA-Tencor (KLAC), and Chevron (CVX) were not compelling enough to force another rally cry.