Stocks finished mixed Thursday as news that third-quarter gross domestic product (GDP) surged much more than expected failed to inspire much buying. The report raised hopes, as well as some concerns, about whether the strong growth can continue.
The Dow Jones industrial average added 12 points, or 0.12%, to 9,786.61. The broader Standard & Poor's 500 index edged down 1.17 points, or 0.11%, to 1,046.94. The tech-heavy Nasdaq composite index fell 3.87 points, or 0.2%, to 1,932.69.
According to an advance report from the government, U.S. GDP surged 7.2% in the third quarter, more than doubling its 3.3% rise in the second quarter and above the 5.8% consensus forecast. In the report, real consumption surged 6.6% after a 3.8% second-quarter increase. Fixed investment shot up 14%. Net exports added, as did government spending, while inventories subtracted $35.8 billion.
"The strength in the data surprised even the most optimistic estimates," says economic research outfit MMS International. "While we're likely to hear from a lot of detractors on the data suggesting solid growth can't be sustained, an expected inventory restocking in the fourth quarter should keep the trajectory on growth solid," says MMS.
Some investors aren't convinced that the economy can keep plugging along at the third quarter's brisk rate. "I think it's an aberration," says Rich Steinberg, president of investment advisor firm Steinberg Global Asset Management. "I think it's pent-up demand, and a seasonal thing, and that we'll get back to three-and-a-half to 4% growth." In particular, Steinberg says he'd like to see more signs of job growth and a pick up in capital spending.
Bulls speculate that a long-lasting recovery will create jobs, while bears voice concern that surge in GDP might prompt Fed to change its view on keeping interest rates low, notes Standard & Poor's MarketScope. Plus, some bears argue that the stock market's advance has already discounted good earnings and economic growth. "The problem is, so many stocks are priced for perfection," Steinberg says.
In other economic news, initial jobless claims declined by 5,000 to 386,000 -- which is the lowest the average has been since February -- in the week ended Oct. 25 from a revised 391,000 in the previous week.
A trifecta of economic data highlight Friday's session. The personal income report takes center stage early, with median expectations for 0.2% increase in income and 0.1% dip in consumption.
The University of Michigan consumer sentiment index is expected to be little changed from the preliminary October reading of 89.4. A larger than expected change may inspire a kneejerk reaction, says MMS International, but Chicago PMI will quickly steal the spotlight.
Chicago PMI -- a regional manufacturing survey -- is expected to post a decent gain, with the median forecast pointing toward a jump to the 55 level from September's 51.2. A surge to this area or better would add pressure to Treasuries, says MMS.
On the earnings front Thursday, Electronic Data Systems (EDS) reported breakeven earnings in the third quarter, vs. 21 cents a year ago, despite 3% organic revenue growth.
Elsewhere in tech, eBay (EBAY) shares gained ground after the company reaffirmed its guidance at yesterday's analyst conference, saying fourth-quarter EPS (GAAP) could be 19 cents on revenue of up to $590 million. The online auction outfit says 2003 EPS could be 65 cents on revenue of up to $2.1 billion, and 2004 EPS could be 91 cents on revenue of up to $2.9 billion.
BMC Software (BMC) shares rose after the company reported second-quarter earnings per share of 10 cents, vs. 8 cents a year ago, on a 15% revenue rise. On a GAAP basis, it posted a 6 cent loss, vs. 4 cents EPS a year ago.
Exxon Mobil (XOM) shares fell after the energy giant reported third-quarter earnings per share of 55 cents, vs. 44 cents a year ago and below analysts' forecast, on an 11% revenue rise.
In the financial sector, Capital One Financial (COF) shares lost ground after the credit card issuer says it sees lower than expected 2004 EPS of $5.20 to $5.40. It expects 2004 growth rate of managed loan portfolio to be in the mid-teens.
Among the latest development in the mutual fund trading scandal, Strong Funds chairman Richard Strong engaged in improper fund trading, investigators said, according to a report in the Wall Street Journal. Strong is the highest-ranking official of a mutual-fund firm to become embroiled in the state and federal investigations into market timing, the newspaper reports.
And Massachusetts's pension board voted unanimously to withdraw $1.7 billion from state retirement accounts managed by Putnam Investments, according to news reports.
Treasuries ended lower in price following a surprisingly strong surge in GDP. Some short covering into the close pared some of the damage, says MMS International.
MMS notes that GDP data "put the market on notice that the economy is roaring back." The solid growth and signs of improvement in the job market, with initial claims holding in the 386,000 area, "will inevitably put Fed rate hikes in motion," MMS says.
European stock markets finished higher. London's Financial Times-Stock Exchange 100 index gained 35.2 points, or 0.83%, to 4,300.9 as Britain's consumer confidence remained unchanged at negative 3 in October. Bonds fell on the perception that the Bank of England will raise rates at next week's policy meeting to stabilize the rising economy.
In Paris, the CAC 40 was up 20.41 points, or 0.61%, to 3,387.36, as French consumer confidence rose to an 8-month high in October. Alcatel was lower after saying third-quarter sales fell 13%. Aventis also fell after reporting that sales of its antihistamine Allegra declined 17% in the third quarter.
Germany's DAX index rose 28.51 points, or 0.79%, to 3,643.93. In economic news, German consumer confidence stalled amid concerns government's pension reforms will cause shoppers to curtail purchases.
Asian markets finished mixed Thursday. In Japan, the Nikkei 225 index fell 43.66 points, or 0.41%, to 10,695.56. In Hong Kong, the Hang Seng index gained 12.84 points, or 0.11%, to 12,143.35.