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Though markets were choppy all week, stocks closed slightly higher on Friday after remarks by Federal Reserve Chair Janet Yellen reassured investors that the path to higher interest rates would be gradual and data-driven.2 Investors also got a look at the final Q4 Gross Domestic Product (GDP) reading, which showed that the economy grew just 2.2% in the last three months of the year.3 While this isn’t a bad number by any stretch, economic growth cooled significantly from the 5.0% growth seen in the third quarter.4 Overall, the economy grew 2.4% in 2014, up from 2.2% in 2013.5
Investors care about GDP reports because they provide the most comprehensive scorecard about the overall health of the economy. Since healthy economic growth helps boost corporate profits, over the long run stock market performance tends to mirror economic performance. In the short term, as we have seen, markets can behave unpredictably even during periods of positive economic growth.
Digging deeper into the GDP data, we see that strong consumer spending, exports, and business investment were strong last quarter. However, the economy cooled because of higher imports and lower federal government spending.6 Bottom line: The economy was fundamentally on very stable footing at the end of the year. Though we don’t have first quarter GDP numbers yet, it’s clear that the Fed feels comfortable enough about the economy to think about raising rates.
The holiday-shortened week ahead is packed with important economic data and marks the end of the first quarter. Analysts will be looking particularly closely at Friday’s March jobs report, which will add fuel to the debate around when the Fed will raise interest rates. A report that shows healthy improvement in the labor market might signal that the economy is robust enough to withstand rate hikes. We expect markets to remain volatile going into earnings season as investors wait to see how U.S. companies did in the first three months of the year.
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