Wall Street edges out another win, despite GDP miss and Capitol Hill mess

MANHATTAN (CN) — This week saw investors whipsawed by an infrastructure legislation that, once again, did not manage to pass. They were hit by a dismal report by the Commerce Department that showed the U.S. gross domestic product slowing. And they had to contend with mixed earnings releases.

Still, the Dow Jones Industrial Average gained 142 points by Friday. The S&P 500 and Nasdaq did even better, both setting new records, with the former gaining 61 points to settle at 4,605 points and the latter increasing 408 points to hit 15,498 points.

Midweek on Capitol Hill, it looked like a scaled-down version of the Biden administration’s Build Back Better proposal might pass. While the $1.8 trillion in new spending would be paid for in full by tax hikes, economists are not optimistic the spending proposals will provide much of an economic jolt.

“The economic boost [from the plan] will be substantially smaller because, with the economy already at capacity, the multiplier is likely to be well below on,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. “The estimated multiplier for the stimulus package passed in March was as low as 0.3, and that stimulus came at a time when GDP was still well below its pre-pandemic level.”

Hunter noted the chances of the smaller infrastructure bill now also faces problems due to progressives in the House wanting to wait until the Build Back Better bill is ready to go.

“Infrastructure week became a running joke during the Trump administration, and with the progressives blocking another vote this week, the Biden administration is apparently doomed to the same fate,” Hunter wrote.

Wall Street already had faced some dismal news earlier on Thursday, when the Bureau of Economic Analysis reported that gross domestic product increased by only 2% during the third quarter, less than one-third the 6.7% growth reported during the second quarter. The estimate is also slightly lower than the 2.8% most economists had predicted.

While the report is merely an advance estimate that will be revised further next month, it paints a picture of an economy slowing down. Most experts blamed persistent and worsening supply shortages, as well as the remnants from the delta variant of Covid-19, for the lackluster GDP results.

According to the report, durable goods consumption fell by 26% last quarter, which was mostly due to a 54% annualized decline in motor vehicle purchases caused by semiconductor shortages.

Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, called the GDP estimate “very disappointing,” even if continued growth was a long shot. “It was to be expected that growth would slow down, as the U.S. economy can’t sustain 6% or higher growth for long, but to drop all the way back to 2% is disappointing and should reignite the growth slowdown debate in the midst of inflation continuing to run much higher than average,” he said in a statement.

He noted that the latter half of 2022 will become more challenging, particularly if inflation remains high and the Federal Reserve raises rates during the latter half of the year, but that the stock market should continue to thrive.

“As long as the reopening continues and people go back to their offices, resume business travel (even if at lower than pre-2019 levels), and consumers maintain their spending patterns — of which are reasonable assumptions and part of our base case — then the economy can continue to grow and earnings growth can allow stocks to grow into their valuations,” Zaccarelli said.

Some experts picked out the good parts of the report, focusing on the fact that GDP is still 1.4% higher than before the pandemic and predicting a stronger fourth quarter and 2022.

“We are confident that the fourth quarter will be much better,” wrote James Knightley, chief international economist at ING. “Inflation is a bit of a concern due to its impact on spending power, but incomes are rising and household balance sheets are in great shape with household wealth having increased $26 trillion since the end of 2019.”

Knightley predicts the U.S. economy will expand by about 6% in the fourth quarter.

In the meantime, earnings have already driven market gains the past two weeks, and that was similar this week. A few speed bumps nevertheless stalled markets a bit.

Despite the computer chip shortage affecting cars, automaker Ford reported very good third-quarter results, showing a net income of $1.8 billion and restored its dividend for investors. While the company’s adjusted earnings are down about 20% year over year, it has done better than analysts predicted.

An ebullient CEO Jim Farley trumpeted what he called “the most exciting Ford lineup I’ve seen,” and told investors “we’re just getting started.” The company also has raised its fourth-quarter guidance, noting the computer-chip shortage has gotten better and raising its full-year 2021 earnings from $10.5 billion to $11.5 billion.

Pharmaceutical giant Merck also surpassed analyst expectations and raised its full-year forecast, showing a 20% year-over-year increase in sales, driven by both Covid-19 treatments and its stable pillar of oncology drugs. The company stands to reap $1.2 billion from its new molnupiravir Covid treatment if it receives approval from the Food and Drug Administration.

Other companies, such as fast-foot giant Yum Brands and telecommunications company Comcast, also beat analyst expectations in their earnings releases.

After Thursday’s closing bell, disappointing results from Amazon and Apple took their toll on equities. The former company missed expectations for both revenue — it showed $110 billion last quarter versus at least $111 billion expected — and a $3.2 billion decrease in net income last quarter.

In its fourth-quarter release, Apple said it has been hard-hit by the supply gridlock, with its revenue coming in under analyst expectations. Its revenue from the iPhone is still up nearly 50% year-over-year, however, and in total the company has seen its revenue grow by 29% since last year.  

Investors have started to tune out the good news on the labor front, as unemployment claims once again fell to 281,000 initial claims for the week ending October 23, a new low during the pandemic. This is the fifth straight week of declining claims and the third straight week where initial claims hit under the 300,000 mark. Currently every state has unemployment rates under 3% except California, which is at 3.2%. Puerto Rico and the District of Columbia also have higher unemployment rates.

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