The major domestic equity indexes were higher on Thursday, as Treasury yields rose off 15-year lows, with investors optimistic about the latest round of U.S.-China trade talks.
But the day’s advance was limited by concerns about economic data. The domestic economy slowed more than initially thought in the fourth quarter, keeping growth in 2018 below the 3 percent annual target, and corporate profits failed to rise for the first time in more than two years.
Worries about economic growth hit markets last week after the Federal Reserve abandoned projections for any interest rate hikes this year and the Treasury yield curve inverted for the first time since 2007.
Benchmark 10-year yields rose off 15-month lows but the yield curve between three-month bills and 10-year notes remained inverted.
Senior U.S. officials arrived in Beijing on Thursday for a fresh round of trade talks, which will be followed by a round in Washington next week. Trade-sensitive industrial stocks rose 0.8 percent and were among the day’s top-performing sectors.
On Wednesday China made unprecedented proposals in talks on a range of issues, including forced technology transfer, as the countries work to overcome the remaining obstacles to a deal to end their trade war.
Consumer discretionary stocks rose 0.6 percent, helped by gains in shares of clothing firm PVH. Calvin Klein’s owner forecast full-year adjusted profit and sales above Wall Street’s expectations.
Approximately 6.27 billion shares changed hands on the major domestic equity exchanges on Thursday, as compared to the 7.54 billion share average over the past 20 trading days.
Fourth-Quarter GDP Revised Down
Our domestic economy slowed more than initially thought in the fourth quarter, keeping growth in 2018 below the administration’s 3 percent annual target, as corporate profits failed to rise for the first time in more than two years.
According to a report released by the Commerce Department on Thursday morning, gross domestic product (GDP) increased at a 2.2 percent annualized rate as of the third reading of fourth-quarter GDP growth. That was down from the 2.6 percent pace estimated in February.
The economy grew at a 3.4 percent pace in the third quarter. The expansion will be the longest on record in July. The revisions to the fourth-quarter GDP reading reflected markdowns to consumer and business spending, as well as government outlays and investment in homebuilding.
For all of 2018, the economy grew 2.9 percent as previously reported, despite the White House’s fiscal stimulus of $1.5 trillion in tax cuts and more government spending. Growth last year was the strongest since 2015 and was an acceleration from the 2.2 percent logged in 2017.
Compared to the fourth quarter of 2017, the economy expanded 3.0 percent, revised down from the 3.1 percent reported last month.
There are signs the slowdown in growth persisted early in the first quarter, with retail sales rising modestly and manufacturing production and homebuilding tepid.
That was underscored by weak profits in the fourth quarter. After-tax corporate profits were unchanged for the first time since the third quarter of 2016, after growing at a 3.5 percent rate in the third quarter. A profit measure that corresponds to S&P 500 profits fell $34.2 billion in the fourth quarter.
The economy is facing headwinds from the fading stimulus, slowing global growth, Washington’s trade war with China and uncertainty over Britain’s departure from the European Union.
These contributed to the Federal Reserve’s recent decision to bring its three-year campaign to tighten monetary policy to an abrupt end. The Fed abandoned projections for any interest rate hikes this year after increasing borrowing costs four times in 2018.
Growth in consumer spending, which accounts for more than two-thirds of all domestic economic activity, increased at a 2.5 percent rate in the fourth quarter instead of the previously reported 2.8 percent pace. Consumer spending remains underpinned by a strong labor market.
Growth in business spending on equipment was revised down to a 6.6 percent pace from a 6.7 percent rate. Investment in intellectual products was lowered to a 10.7 percent rate from the 13.1 percent pace reported in February.
Investment in residential construction was revised to show it contracting at 4.7 percent rate instead of at a 3.5 percent rate, marking the fourth straight quarterly decline.
Government investment fell at a 0.4 percent rate, instead of growing at a 0.4 percent pace as previously reported.
However, exports were revised up to show them rising at a 1.8 percent pace instead of the 1.6 percent rate reported last month. Imports were revised down, leading to a smaller trade deficit that cut one-tenth of a percentage point from fourth-quarter GDP growth.
The trade deficit was previously estimated to have subtracted 0.22 percentage point from output. Inventories increased at a $96.8 billion rate in the fourth quarter instead of the $97.1 billion reported last month.
Inventory investment added one-tenth of percentage point to GDP growth last quarter as estimated last in February.