Does Good News Mean Bad News?
Some analysts worry that this week's GDP results could be too much of a good thing. Don't believe it for a second.
As happy as I was to see the strong 5.7% real GDP growth rate for the fourth quarter, the number spooked some sectors of the economics community. For the month, the market gave up 3.5% despite stellar economic news and generally better-than-expected earnings from the likes of behemoths Amazon (AMZN) and Microsoft (MSFT).
While I am excited about what a stronger economy could mean for employment and corporate profits in the months ahead, others worry that this week's results could be too much of a good thing. Some analysts worry that a stronger economy will lead the Fed to raise interest rates, a move that could tighten the tourniquet even further on the already struggling housing market. Others worry that as the U.S. economy begins to grow faster than other developed economies, the dollar may strengthen, depressing U.S. exports sales. A stronger economy has already led some businesses to report that input prices are going up a bit faster than the recent past, potentially depressing corporate profit margins.
Many of these concerns are legitimate, but a little premature in my opinion. Offsetting some potential cost issues, I believe revenue growth and operating leverage can combine to keep profit dollars and earnings per share moving upward for some time. Given huge pent-up demand in both the housing and auto sectors, which I discuss below, I believe the economy has more runway in front of it than most people anticipate, even with higher rates and a stronger dollar.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.