The Dow and S&P 500 opened higher today, after the US economy grew more than anticipated in the third- quarter.

‘The stock rally is not over yet,’ said Jeffrey Kleintop of LPL Financial. ‘The stock market can celebrate. This news is an important confidence boost, in particular to individual investors.’ [1]

A preliminary report from the Commerce Department revealed that the US economy expanded by a bigger-than-expected annual rate of 3.5% in the third-quarter, bringing to an end the US recession.

The report revealed that third-quarter growth was attributable to a strong upturn in consumer spending, which rose by 3.4%. Residential investment and government spending also contributed to the rise in GDP, with the former surging 23.4% and the latter up 7.9% from the second-quarter.

There is mounting concern that GDP growth has been predominantly driven by government spending. According to the White House’s Council of Economic Advisers, the government’s stimulus added over 2% to real GDP growth in the third-quarter.

‘A lot of this is thanks to government support,’ said Kathleen Stephansen of Aladdin Capital Holdings in an interview on Bloomberg Television. ‘We still have major headwinds for the consumer. That worries me. The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.’

International trade and business spending were among the components stunting GDP growth; US exports rose by 14.7% while imports increased 16.4% in the third quarter. Meanwhile, business spending reduced GDP by 0.24 percentage points, falling by 2.5% on the quarter.

Economists at Goldman Sachs believe that the US economic recovery will be ‘sluggish’ with inflation and interest rates remaining low. They warned that small businesses are still underperforming and that the American labour market is still weak.

A separate report released today also helped stock market sentiment. The Labour Department revealed that fewer Americans filed for first-time jobless benefits last week. The report showed Initial jobless claims falling by 1,000 to 530,000, while those continuing to claim jobless benefits for more than week dropped by 148,000 to 5.8 million.

By 3:30pm (London time), the Dow Jones Industrial Average was 81.77 points (+0.84%) above its previous close at 9844.46, while the broader S&P 500 was 11.86 points (+1.14%) higher at 1054.49. The Nasdaq, meanwhile, fared relatively better, rising 21.26 points (+1.25%) to 1703.02.

The upbeat GDP report helped commodities rally as well, with December crude oil futures climbing as much as 3% to $79.45 a barrel. December gold futures rose 1.2% to $1042.4 per troy ounce while December high grade copper surged 3% to $3 per pound. Commodity prices were bolstered by a renewed bout of US Dollar weakness.

A rally in metal prices helped US mining companies advance this afternoon. Barrick Gold jumped 6.13% to $36.7 a share while Newmont Mining, the largest US gold producer, advanced 3.7% to $43.06 after reporting third-quarter profits of 79 cents a share, beating Bloomberg’s expectations for a 55 cent per-share profit by over 40%. The company’s bottom line was helped by higher bullion prices and lower production costs.

Banks were also in demand, with the likes of Citigroup up 3.7% to $4.23, Bank of America gaining 2.5% to $15.38 and Wells Fargo 1.7% higher to $27.92.

US mobile phone-maker Motorola was among the day’s top performers as well, up 12% to $8.92 reporting third-quarter profits that were ahead of expectations. Procter & Gamble, the world’s largest consumer-products company, gained 3.6% to $59.29 after reporting first-quarter earnings that topped consensus estimates. The company also raised its full-year forecast for organic sales growth.

Bucking the positive trend was energy giant Exxon Mobil, which slid 1.4% to $72.82 after reporting third-quarter net income of 98 cents a share, trailing Bloomberg’s median estimates by 4 cents.

First Solar was another casualty, tumbling 15.2% to $128.42 after unveiling smaller-than-expected third-quarter sales of $480.9 million.

Although Wall Street is experiencing a bit of a breather, there are still those who believe that a correction may ensue.

The S&P 500 yesterday closed at 1042.63, below its 50-day moving average of 1050.282 – technical analysts see this as a bearish signal which suggests that Wall Street may extend their retreat.

‘A close below the 50-day moving average is certainly a negative sign,’ John Murphy, a chief technical analyst told Bloomberg. ‘If it’s broken, it simply indicates the market is going into somewhat of a deeper correction.’

Morgan Stanley was also bearish, saying that the global stock market rally may end once government spending slows. ‘Such echo rallies are never as big as the original one and we will see it fading away,’ said Ruchir Sharma of Morgan Stanley. ‘The rally will end as the effects of the stimulus begin to fade and the credit bubble caused by easy money disappears.’ [2]

Source: [1], [2] Bloomberg News (29 October 2009)

By Anthony Grech, Research Analyst, IG Index.

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