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Dow Finally Pulls Ahead After Vicious GDP Imbalance Rattles Bond Markets

Last Updated September 23, 2020 12:39 PM
Sam Bourgi
Last Updated September 23, 2020 12:39 PM

By CCN.com: After struggling for much of the session, the Dow and broader U.S. stock market pulled ahead Friday even as stronger-than-expected GDP data exposed significant imbalances in the world’s largest economy. Those imbalances rattled bond markets, sending yields lower.

Dow Rallies; S&P 500, Nasdaq Hit New Highs

All of Wall Street’s major indexes struggled for direction earlier in the day, which reflected a tepid pre-market for Dow futures. After dropping by as much as 70 points, the Dow Jones Industrial Average reversed course to gain 81.25 points, or 0.3%, to 26,543.33.

After a tepid start, the Dow Jones Industrial Average breaks higher in afternoon trade. | Chart via Yahoo Finance.

After initial weakness, the broad S&P 500 Index of large-cap stocks traded in positive territory, gaining 0.5%% to 2,939.88. That was a new record close for the index.

The technology-focused Nasdaq Composite Index also settled in record territory, climbing 0.3% to 8,146.40.

U.S. GDP Growth Blows Past Estimates, with a Few Important Caveats

donald trump GDP stock market Dow
U.S. economy gathers pace in the first quarter, but concerns about weak consumer spending threaten the stock market’s outlook. | Source: REUTERS/Jonathan Ernst

The U.S. economy gathered pace in the first quarter, as rising exports and higher inventory investment offset a sharp slowdown in consumer spending.

Gross domestic product (GDP) – the broadest measure of economic growth – expanded at an annual rate of 3.2% in the first quarter, the Department of Labor reported Friday. That was the strongest start to a year since 2015 and well above the median estimate calling for 2% growth.

Investors were initially hesitant about the report because it showed that consumer spending grew just 1.2% between January and March, down from 2.5% in the fourth quarter. Consumer spending account for more than two-thirds of economic output.

A big bulk of the quarterly gains, namely 1.03 percentage points, was attributed to net exports. A rise in net exports means imports declined. Depending on who you ask, this can be a good thing or a bad thing.

On the one hand, it suggests that U.S. trade policy is working favorably for exporters; on the other hand, declining imports often points to a slowdown in domestic consumption and a deceleration in the overall economy.

That apprehension was reflected in the bond market on Friday as Treasury yields fell. The benchmark 10-year yield fell to 2.502% from 2.536% on Thursday. Yields fall when bond prices fall.

The U.S. dollar also fell against a basket of competitor currencies as traders sought refuge in gold. The DXY dollar basket fell 0.3% to 97.95.

Click here for a real-time Dow price chart.