U.S. equity markets jumped on the last trading day of the month as traders parsed data on the overall U.S. economy, Midwest manufacturing, and a surprise rate cut from Japan’s central bank.
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The Dow Jones Industrial Average surged 393 points, or 2.45% to 16463. The S&P 500 gained 46 points, or 2.45% to 1939, while the Nasdaq Composite surged 107 points, or 2.38% to 4613.
All 10 S&P 500 sectors were in positive territory as technology, energy, and materials led the way higher. The tech sector saw substantial gains thanks to heavyweights Microsoft (MSFT), Apple (AAPL), and IBM (IBM).
Markets posted strong gains as traders digested a trio of factors including a slight rally in oil prices, weak GDP figures on U.S. economic growth, and a surprise rate cut from the Bank of Japan.
The Commerce Department’s first reading on fourth-quarter economic growth came in slightly under expectations. The data showed the world’s biggest economy grew 0.7% during the period, down from a 2% pace in the third quarter. Economists had forecast a gain of 0.8%.
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Barclays economist Jesse Hurwitz pointed out that growth for the month was largely driven by consumption and residential investment, while private business investment slowed thanks to the downturn in the energy sector.
“Together, better-than-expected growth in big-ticket purchases should allay concerns of a retrenchment in U.S. consumer spending,” Hurwitz indicated in a note. “We expect growth will bounce back to 2.5% in Q1 2016, driven by better domestic demand and less of a drag from inventory growth and net trade.
David Lafferty, chief market strategist at Natixis Global Asset Management, which oversees $966 billion in assets under management, said while the personal consumption data was positive, consumers are still being stubborn with spending the money saved on heating and gas. He said he expects the spending to pick up later in the year as consumers grow more confident that lower gas prices will stick around and they’ll be able to spend a little more while still being able to save.
He added that while there was nothing gangbusters about the report to make investors cheer the result, the implication for future rate hikes helped the markets rally on the back of the data’s release.
“There was little change to the employment cost index, and I think that keeps the Fed on hold longer,” he explained. “Nothing stuck out [in the report], which was the most interesting thing. Most of the major components just added less to GDP than they did last time.”
Market analyst Jack Mullen said in a note that the GDP report could help quell worries in the oil market, and light a lamp of hope for the global economy.
“Historically, an expanding U.S. economy has led the world economy higher rather than vice versa, and therefore from my experience, investors should not read too much into falling oil prices regarding the pace of future U.S. growth. It is just too much supply,” he said.
Global crude significantly scaled back the session’s gains as hopes faded for an agreement among the world’s biggest producers to cut output in an effort to reduce the global supply glut that’s proved to be a significant overhang on the market for the last two years. The move came after Dow Jones reported Iran would not join OPEC on any coordinated production cut until its own output levels returned to those it saw before sanctions were imposed on the nation.
West Texas Intermediate crude prices rose 1.20% on the session, but saw a 9.23% drop for the month to $33.62 a barrel, while Brent, the international benchmark, gained 2.51% on Friday, but lost 6.81% in January, falling to $34.74 a barrel.
While oil prices and equity markets have seen a bout of extreme volatility in the first month of 2016 as they saw the worst start to a new year ever within the first two weeks of trade, independent market analyst Peter Kenny said there’s still hope for confidence to rebound as the global landscape continues to shift, and the U.S. continues to stand on its own two feet.
“If we continue to see U.S. equity markets decouple from Chinese panic-ridden meltdowns, and if we continue to see a degree of stabilization in the crude market, and if we continue to see cheap gas, high levels of consumer confidence, employment gains, strength in the housing market, and modest economic expansion, we might have a run at regaining some of the ground we lost at the outset of the year,” he said.
He said while it’s a lot of ifs, that’s what it will take to reverse sentiment in February.
Still, the monthly losses for Wall Street are telling, painting a picture of the fear that has gripped global markets. The Dow and the S&P 500 saw their worst performance in five months as the Dow and S&P 500 shed more than 5%, while the tech-heavy Nasdaq dropped 7.8%.
Two other economic reports on the U.S. economy were released on Friday. The Institute for Supply Management-Chicago’s gauge of factory activity in the Midwest region jumped out of contraction territory. The gauge rose to 55.6 from 42.9.
Consumer sentiment figures from the University of Michigan showed the gauge slipped to 92 in January from a preliminary reading of 93.3 earlier in the month.
Adding to the market’s positive momentum was a move from the Bank of Japan, which unexpectedly cut its benchmark interest rate below zero overnight. The central bank slashed rates to -0.1% from 0.1% in an effort to boost its economy and overcome a deflationary situation. The move comes just days after the Federal Reserve voted to keep interest rates steady in January, and attempted to alleviate concern about more rate hikes in an unstable global economic environment.
Markets in Asia responded positively to the move, sending China’s Shanghai Composite up more than 3%, while Hong Kong’s Hang Seng and Japan’s Nikkei moved up more than 2.5%. Meanwhile, European equities moved solidly higher on the back of the decision.