Wentz Weekly: Strong GDP Drives Stocks Higher

Wentz Weekly Insights
Strong GDP Number Drive Stocks to New Highs

Market activity was very light last week as was trading, with volume about two-thirds the level of an average week. A solid showing on Tuesday and Wednesday’s half day led the US stock indices to a positive week with the S&P 500 leading the way with a 1.40% gain while the small cap Russell 2000 index gained just 0.20%. Treasury markets were relatively unchanged, the 2-year yield was 3.48% while the 10-year yield remained at 4.14%.

The highlight of the week came from the first estimate of third quarter GDP (gross domestic product – generally viewed as economic growth). The first estimate, which was delayed by nearly two months, showed the economy grew at a 4.3% annualized rate in the quarter, well ahead of the consensus estimate of 3.2%.

The most important category since it makes up around 70% of the US economy, which is consumer spending, increased a solid 3.5% (contributing 2.4% to the headline 4.3% GDP number). Spending was driven by a 3.7% increase in services spending as well as a 3.1% increase in spending on goods. Despite consumer surveys and consumer sentiment readings showing worries about the economy, one thing that is for sure is consumers continue to spend and is one of the main reasons the economy remains strong.

Net exports contributed 1.6% to the GDP figure, this was thanks to a 8.8% surge in exports and only partially offset by a 4.7% decline in imports. The economy continues to normalize after a surge in imports the first half of the year due to the impacts from tariffs. A high net export (the US exporting more than it imports) is a positive to GDP.

Government spending increased 2.2% mostly due to higher defense spending, and contributed 0.4% to GDP. Businesses’ fixed investments were solid, increasing 1.0% due mostly to data centers, while residential investments (housing) declined 5.1% as homebuilding remains subdued. Finally, the change in inventory growth was negative as businesses work through inventory, with this category contributing -0.2% to GDP.

Overall it was a very solid report but sometimes the headline is misleading. A better measure of core domestic US growth, which focuses more on consumer spending, business investments, and home building, increased 3.0% annualized in the quarter, and is up 2.6% from a year ago, while lower than the headline figure it is still a solid number.

The implication of a stronger economy is possibly less rate cuts. After the report the futures market was pricing in 41 basis points (0.41%) of rate cuts next year, down from over 50 basis points prior.

This week will be very quiet with the markets closed Thursday for New Year’s Day and no earnings or corporate events and very light on the economic calendar.

We wish everyone a prosperous and Happy New Year!

Recent Economic Data

• GDP (Delayed): The first estimate of third quarter GDP, delayed nearly 2 months, showed the economy grew at a 4.3% annualized rate in the quarter, well above estimates of 3.2%. Consumer spending, which is by far the most important component of GDP as it makes up 70% of the US economy, increased 3.5% and contributed 2.4% to the headline GDP number. Spending on goods increased 3.1% while spending on services increased 3.7%. Fixed investments were mixed with nonresidential investments increasing 1.0%, contributing 0.4% to GDP, while residential investments, like housing, declined 5.1% and contributed -0.2% to GDP. Government spending increased 2.2% due mostly to defense spending and contributed 0.4% to GDP. Businesses worked through inventory with inventory growth subtracting 0.2% from GDP. Finally, exports surged 8.8% while imports continue to normalize after the massive first quarter (due to company’s attempt to get ahead of and avoid tariffs) with a 4.7% decline, leading to a 1.6% increase in net exports. Finally, gross domestic private purchases, a core measure of domestic US economic growth, increased a solid 2.9%.

• Industrial Production: Industrial production increased 0.2% in November, slightly better than the 0.1% increase expected and after a 0.1% decline in October. The increase was due to a 1.7% increase in mining, offset by a 0.4% decline in utilities which is mostly related to weather, while manufacturing production was flat in the month. Capacity utilization saw a slight increase in the month to 76.0% and remains within the lower end of its recent range.
• New Home Sales: Delayed
• Jobless Claims: The number of jobless claims the week ended December 20 was 214,000, a decrease of 10,000 from the prior week with the four-week average at 216,750. The number of continuing claims was up 38,000 to 1.923 million with the four-week average down slightly to 1.894 million.
• Consumer Confidence: The Conference Board’s consumer confidence index declined by 3.8 points in December to 89.1 for the fifth consecutive monthly decline “as perceptions of business conditions were negative, and apprehensions about jobs and income deepened.” The present situations index fell a steep 9.5 points to 116.8 while the expectations index held unchanged at 70.7, below 80 for the 11^th consecutive month, a threshold that signals a recession ahead

Company News

• Novo Nordisk: Shares of Novo Nordisk were higher after it was reported the FDA has approved an oral version of its weight loss drug Wegovy, the first GLP-1 pill to be approved for weight management. Until this approval, the method of the weight loss drug was via injection. The new drug is expected to hit markets in January.

• Nvidia: Reuters reported Nvidia is planning to start shipping its H200 GPU chips to China beginning in February. These are some of the more advanced chips (but not its most advanced) in the world that the US government recently gave approval to export, and will collect a 25% fee on all sales. Orders are expected to come from existing inventory and in the second quarter will begin coming from new production.

• M&A Activity: ServiceNow said it will acquire cyber risk company Armis for $7.75 billion in cash. Janus Henderson agreed to be acquired by private equity firms Trian Fund Management and General Catalyst Group Management for $7.4 billion in all cash, about a 18% premium to where shares traded prior to the first report in October. Financial analytic firm Clearwater Analytics agreed to be acquired by a group of investors led by Warburg, Pincus, and Permira for $8.4 billion, a 47% premium to where shares traded prior to the announcement. Alphabet said it will acquire data center and energy infrastructure company Intersect for $4.75 billion in cash, plus the assumption of debt.

• Intel: Shares of Intel fell after Reuters reported that Nvidia, after investing $5 billion in the company, did not commit to moving forward with using Intel’s cutting-edge 18A manufacturing process for its own chips after its testing and evaluation. The report notes Nvidia’s ongoing concerns about Intel’s foundry (chip manufacturing) capabilities despite Intel’s new technology and partnerships. In addition, Broadcom evaluated Intel’s manufacturing processes but made a similar outcome as Nvidia, choosing to not move forward with production commitments. Intel has made a push to compete with the juggernaut in the industry, Taiwan Semiconductor.

• Trump Pressures Defense Firms: President Trump called on US defense companies to speed up the production of weapons systems and shift how they are using their capital, urging them to prioritize building new facilities and deliver equipment faster while asking to cut back on stock buybacks, dividends, and high executive compensation. He also said he plans to meet with defense industry executives to push this agenda and indicated he may make an executive order to achieve this.

WFG News

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