Good news: the economy is still growing, albeit far slower than in previous years. And even though continued expansion could signal a smaller rate cut from the Federal Reserve next month, investors on Friday bought stocks happily on hopes that the recent data mean a recession has been averted.
The Dow Jones Industrial Average ended higher by 117.70 points, or 1.10%, to 10,810.05. The Nasdaq Composite index added 40.95 points, or 2.01%, to 2,075.83. Meanwhile, the broader S&P 500 was higher by 18.55 points, or 1.50%, to 1,253.07.
U.S. gross domestic product (GDP) surged 2.0% in the first quarter after a 1% gain in the fourth quarter of last year, completing its tenth year of growth. Consumption rose 3.1% while equipment, software spending fell 2.1% while trade and government spending rose 4.0%. All of these figures were much stronger than expected, which appears to be good news for the broader economic outlook, but will possibly curb the Fed's policy-setting actions at its next meeting on May 15.
Investors were encouraged by this week's strong data on housing sales and GDP, says Peter Boockvar, equity strategist at Miller Tabak & Co. The Dow finishes this week, up more than 2% while the Nasdaq is down around 4% compared to last week. "The market is saying we're not going into recession. Hopefully with rate cuts we should see a better second half of the year for corporate profits," Boockvar says.
In other economic data, the University of Michigan consumer sentiment reading for April pulled back 3.1 points to 88.4, weaker than an expected gain from last month. However, the lower figure is in line with other recent readings of consumer sentiment. Economists point to continued strength in consumer spending as the key factor keeping the economy from retracting.
One cautionary note amid the GDP euphoria: Gasoline futures reached record high levels. One trader quoted by Standard & Poor's thinks prices in the near future could go even higher, due to shortages and huge demand. Rising energy prices could worsen retail inflation.
Among Friday's stocks in the news: fiber optic cable maker Corning Inc. (GLW ), which posted strong first quarter results, but cut guidance for the rest of 2001 and planned 4,300 layoffs.
Meanwhile, No. 1 biotech company Amgen (AMGN ) lowered its sales expectations due to delays in approvals of key products. Biotech stocks, which were helped by news that Celera Genomics Group (CRA ) completed sequencing the genetic map of the mouse, led the Nasdaq higher.
Treasuries finished the day lower after the initial read on first quarter gross domestic product came in better than expected at 2.0% growth, compared with an expected 1.0%. Consumer spending, at 3.1%, drove growth. The positive data suggest that the Federal Reserve's interest rate cuts this year are helping to spark the lagging economy and keeping the U.S. from slipping into a recession. This creates weakness in treasuries, which have been trading off as the economy and stock market show signs of strength.
European markets ended Friday with strength on the heels of solid U.S. GDP data. In London, the Financial Times-Stock Exchange 100 index finished up 83.10 points, or 1.42%, to 5,951.40. In Germany, the DAX Index gained 51.58 points, or 0.84%, to 6,175.24. In France, the CAC 40 ended up 94.24 points, or 1.72%, to 5,575.97.
In Asia, the markets finished mixed. The Nikkei lost 38.71 points, or 0.28%, to 13,934.32. In Hong Kong, the Hang Seng added 92.93 points, or 0.70%, to 13,386.04.
By Amy Tsao in New York