Federal Reserve Chair Jerome Powell sent share prices higher on Wednesday after he indicated the policy rate is now “just below” estimates of a level that neither brakes nor boosts a healthy economy, comments that many took as signaling the Fed’s three-year tightening cycle is ending.
The S&P 500 index and Dow Jones Industrial Average posted their largest percentage gains in eight months, while the Nasdaq saw its largest advance in just over a month following Powell’s speech to the Economic Club of New York.
Powell said that while “there was a great deal to like” about U.S. prospects, “our gradual pace of raising interest rates has been an exercise in balancing risks.”
Earlier in the day, in its first-ever financial stability report, the Fed cautioned that trade tensions, Brexit, and troubled emerging markets could rock a U.S. financial system where asset prices are “elevated.”
The Commerce Department affirmed that GDP grew in the third quarter at a 3.5 percent annual rate, but the goods trade deficit widened, consumer spending was revised lower and sales of new homes tumbled, suggesting clouds are gathering over what is now the second-longest economic expansion on record.
Of the 11 major sectors in the S&P 500, all but utilities were positive. Technology and consumer discretionary were the biggest percentage gainers, each up more than 3 percent.
The S&P 500 Automobile & Components index was up 1.4 percent after Trump said he was studying new auto tariffs in the wake of General Motors announcement that it would close plants and cut its workforce.
Humana reduced its 2019 forecast for Medicare drug plan enrollment, but upped its estimated enrollment in the company’s Medicare Advantage plan. Its stock ended the session up 6.2 percent.
Salesforce exceeded analysts’ earnings estimates and forecast better-than-expected 2020 revenue, sending its shares up 10.3 percent. Other cloud software makers rose on the news, with the ISE Cloud Index gaining 3.5 percent.
Microsoft briefly surpassed Apple in market cap but Apple took back its lead by closing. Nevertheless, Microsoft closed 4.0 percent higher as it benefited from optimism regarding demand for cloud computing services.
Among losers, Tiffany fell 11.8 percent after the luxury retailer missed quarterly sales estimates on slowing Chinese demand.
Approximately 8.04 billion shares changed hands on the major domestic equity, exchanges, as compared to the 7.82 billion-share average over the past 20 trading days.
GDP Number Unchanged
Gross domestic product (GDP) increased at an annual rate of 3.5 percent the Commerce Department reported on Wednesday, its second estimate of third-quarter GDP growth. That was unchanged from October’s estimate and well above the economy’s growth potential, which economists estimate to be about 2 percent.
The economy grew at a 4.2 percent pace in the second quarter. While businesses accumulated inventory at a faster pace and spent more on equipment than initially thought in the third quarter, that was offset by downward revisions to consumer spending and exports.
Growth is being driven by the $1.5 trillion tax cut package, which has given consumer spending a jolt and bolstered business investment. The government also reported on Wednesday that after-tax corporate profits increased at a 3.3 percent rate last quarter after rising at a 2.1 percent pace in the second quarter.
An alternative measure of economic growth, gross domestic income (GDI), increased at a rate of 4.0 percent in the third quarter, quickening from the second quarter’s 0.9 percent pace.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 3.8 percent rate in the July-September period, up from a 2.5 percent growth pace in the second quarter.
But dark clouds are gathering over the economic expansion that is now in its ninth year and the second longest on record. Business spending on equipment appears to have weakened early in the fourth quarter and higher interest rates are slowing demand for housing.
With oil prices rapidly falling, business spending on equipment is likely to moderate significantly. Lower oil prices tend to hurt investment in the energy sector because of reduced profits. Brent crude oil prices have slumped by more than 30 percent from a four-year high above $86 in early October, pressured by concerns of oversupply amid slowing global economic growth.
Solid third-quarter growth is expected to keep the Federal Reserve on course to raise interest rates in December for the fourth time this year, despite an escalation of criticism from Trump that tighter monetary policy is starting to slow down the economy.
Growth estimates for the fourth-quarter are currently around a 2.5 percent pace. Economists expect GDP growth to slow further in 2019 as the fiscal stimulus fades and the effects of a bitter trade war with China as well as trade disputes with other trade partners take their toll.
The third-quarter growth slowdown mostly reflected the impact of Beijing’s retaliatory tariffs on U.S. exports, including soybeans. Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.6 percent rate in the third quarter. That was down from the 4.0 percent rate estimated in October.
Imports increased a bit faster in the third quarter than previously estimated while the decline in exports was greater than expected, leading to an even wider trade gap. The result was a reduction of 1.91 percentage points from third quarter GDP growth, as compared to the 1.78 percent reported last month. That was the most since the second quarter of 1985.
The rebound in imports was partially driven by strong domestic demand and also reflected a rush by businesses to stockpile before the implementation of import duties, mostly on Chinese goods, becomes effective late in the third quarter.
Imports subtract from GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which contributed to GDP. Inventories increased at an $86.6 billion rate, instead of the $76.3 billion rate estimated in October.
As a result, inventory investment added 2.27 percentage points to GDP growth. That was more than the 2.07 percentage points reported last month and was the biggest contribution since the fourth quarter of 2011.
Business spending on equipment increased at a 3.5 percent rate, instead of the previously reported 0.4 percent rate. That was still the slowest pace in two years. The moderation in business spending has been blamed on the import tariffs, which are increasing manufacturing costs for companies, such as Caterpillar, 3M and Ford.
Some companies, including Apple, used their tax windfall to buy back shares on a massive scale.
New Home Sales Fall
Sales of new homes fell in October chalking up the weakest pace for that statistic since March 2016, as rising borrowing costs and elevated prices reduce sales.
Single-family home sales fell 8.9 percent from the prior month to a 544,000 annualized pace, according to government data Wednesday. September’s upwardly revised pace of 597,000 new homes.
The median sales price dropped 3.1 percent from a year earlier to $309,700, the lowest since February 2017, though still out of reach for many potential buyers.
All four regions showed declines, adding to signs the housing market is cooling amid rising costs of homeownership such as higher borrowing costs, and a scarcity of supply. At the same time, steady job gains and elevated consumer confidence should help underpin demand.
The supply of homes at the current sales rate rose to 7.4 months from 6.5 months in September. The number of new homes for sale at the end of the month increased 4.3 percent to 336,000, indicating improving supply.
The results follow data released earlier Wednesday that showed third-quarter residential investment contracted and were a drag on the expansion.
The decline in purchases was led by a 22.1 percent drop in the Midwest, and an 18.5 percent decrease in the Northeast. The South had a 7.7 percent decline while the West fell 3.2 percent.
New-home purchases are tabulated when contracts are signed, and account for about 10 percent of the market. They’re considered a timelier barometer than purchases of previously owned homes, which are calculated when contracts close.