U.S. equities turned in a directionless performance on Friday in the wake of a disappointing second-quarter GDP report and a lack of new stimulus measures by the Bank of Japan overnight.
The economy grew at a tepid seasonally adjusted annualized rate of 1.2% in the second quarter, up slightly from a 0.8% result in Q1. Consumer spending was a bright spot, up 4.2%. Negatives included a decline in inventories and a drop in housing and business investment.
The result was the worst annual GDP growth performance since 2010, which dampened sentiment.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 Index gained 0.2%, the Nasdaq Composite wafted up 0.1% and the Russell 2000 finished the day 0.2% higher. Treasury bonds were stronger, the dollar was weaker, gold gained 1.2% and oil gained 1.1% to break its six-day losing streak. Defensive telecom stocks led the way with a 1.3% gain while materials lagged.
It was, however, enough to push the S&P 500 to a new intraday high. But the gains remain modest, up just 1.8% from the all-time high set in May 2015. And broader measures of the market, such as the NYSE Composite Index, are still well below the prior peak.
Earnings were again in focus, with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) rising 3.3% on a top- and bottom-line beat driven by a 19.5% jump in advertising thanks to increased use of mobile search and ongoing success in YouTube.
Exxon Mobil Corporation (NYSE:XOM) fell 1.4% — recovering somewhat from an even deeper decline near the open — after reporting a big miss. That boosted the Aug $94 puts recommended to Edge Pro subscribers to a gain of 182%.
Earnings of 41 cents per share missed expectations of 64 cents while revenues of $57.7 billion missed the $59.8 billion estimate. The big drag was the $294 million in upstream earnings — related to the pumping of raw crude — compared to the $2 billion earned last year. Downstream earnings — related to refining — weren’t much better at $825 million vs. $1.5 billion last year. Capital spending was slashed 38% from last year to $5.2 billion.
Asian markets were hit overnight after the Bank of Japan effectively kicked the can on stimulus — raising pressure on the government to implement more aggressive fiscal measures. Against widespread forecasts of a cut in interest rates deeper into negative territory, the BoJ merely boosted its ETF buying program to six trillion yen (from 3.3 trillion), or about $10 billion.
Officials also committed to an evaluation of the effectiveness of current stimulus measures, ostensibly to demonstrate they’ve done all they can and that Tokyo must now take the lead on boosting inflation and economic growth via spending hikes and tax cuts.
But it’ll be hard for the liquidity junkies on Wall Street to not feel disappointed. The BoJ follows “no change” wait-and-see decisions from the Bank of England and the European Central Bank. And it follows a surprisingly hawkish policy statement from the Federal Reserve on Wednesday. Especially since BoJ chief Kuroda said that “helicopter money” stimulus — or government spending fueled by explicit money printing — was not allowed under current law.
So then why did stocks rebound on Friday once the weak U.S. GDP data hit? Simple: It reduces the odds the Federal Reserve will aggressively hike rates later this year. But in my mind, it increases the risk the Fed is stumbling toward a nightmare stagflation scenario, as the GDP price deflator rebounded to 2.2% year-over-year amid ongoing tightening in the labor market.
And it continues some very odd market behavior since the post-Brexit surge stalled out three weeks ago: Stocks have separated from a nasty decline in crude oil and from a pullback in long-term Treasury yields (a sign of defensiveness from bond traders). What’s more, equities have ignored a decline in Q3 earnings expectations. And have ignored new weakness in high-yield bonds.
The result, according to LPL Financial, is the most boring market in 21 years as Friday marks the 12th consecutive day the S&P 500 closed inside a 1% trading range. Remember, we are heading into what’s seasonally a terrible time of the year for stocks (August to October) and what’s likely to be the most contentious U.S. presidential election in modern history (November).
Next week, keep an eye on Friday’s jobs report. A strong showing with further confirmation that the Fed is bumbling into a stagflation policy trap.