Analysts unfazed by economy's fourth-quarter dip

Today’s report that the U.S. economy shrank by 0.1% in December on an annualized basis is probably not a number worth hanging a hat on, according to Paul Schatz, president of Heritage Capital LLC. “The GDP number was a surprise, but it is also a preliminary number that will probably be revised, or several of the months leading up to it will be revised,” he said. “Basically, I don’t think the GDP is as weak as it was reported.” The bigger picture, according to Mr. Schatz and other market watchers, is the current and growing momentum of the financial markets. While Mr. Schatz doesn’t believe that the U.S. economy will be able to meet analysts’ expectations for a 2.5% growth rate this year, he does think the stock market is poised for a strong, if abbreviated, rally. Some of the major equity indexes that already have hit new highs include the Russell 2000 Small Cap Index, the S&P 400 Mid Cap Index and the Dow Jones Transportation Average. Meanwhile, both the S&P 500 and the Dow Jones Industrial Average are within striking distance of the all-time highs set in October 2007. Support for the rally is seen in the latest investor confidence data, Tuesday from State Street Global Markets, which showed January representing the second consecutive month of an increased appetite for equities. Paul O’Connell, senior researcher at State Street, warned against making too much of the recent investor confidence data, but he did acknowledge: “For now, at least, it seems that the steady move away from equities has come to a halt.” “However, I’m not sure I would project that this is a turning point toward equities,” he added. “We would need to see a few more months of this kind of data to say that.” The fact that consumer confidence data, which also came out Tuesday, is moving in the opposite direction of investor confidence is considered an anomaly, but also logical. “As an investor watching your portfolio grow with the market, you have to be feeling pretty good,” Mr. Schatz said. “But if you’re a consumer, you’re starting the year with higher taxes, the job market is the same, and you’ve got all those holiday bills to pay.” The December gross domestic product data, representing one element of a data-rich week, added a slight drag on the equity markets during the first half of the day Wednesday. While the S&P 500 was down less than 1% in midday trading, gold was up 1.3% and the yield on the 10-year Treasury gained more than 2% to a level of 2.028%.