The revised GDP numbers for Q1 came out and they were even worse than the previous revisions coming in at -2.9%. The U.S. experienced the worst first quarter for GDP since 2009. Which raises the question, is the U.S. slipping into recession? A recession would be horrible news for the housing market, the job market, and the stock market. It would be good for bond investors who are hoping to avoid an increase in interest rates.
Although consumer confidence figures remain high, reaching their highest level in six years, and consumer sentiment continues to improve, performance for most retailers has not been very strong. Consumer discretionary stocks in general have not been a vibrant sector. Retail stocks that had been delivering strong numbers (in previous years) such as TJ Maxx (NYSE:TJX), Ross Stores (NASDAQ:ROST) and Tractor Supply (NASDAQ:TSCO) have been very poor performers since late last year.
And in the restaurant group, casual dining stocks Darden Restaurants (NYSE:DRI), the owner of Olive Garden, and Panera Bread (NASDAQ:PNRA) have also demonstrated poor sales. There are definite pockets of weakness in the economy.
So are the -2.9% GDP results in the first quarter evidence that the economic expansion is waning? We are now in the sixth year of an economic expansion and no economic expansion lasts forever. Besides weakness in the consumer sector, the Fed has also started reducing liquidity, creating further cause for concern.
What is interesting to me was how the market reacted to the news. The stock market actually traded up and continued to rally toward new highs. If the market thought we were going into recession that would not be the case. I look at the market as a leading indicator.
There are still several sectors of the market demonstrating strength such as the internet, biotech, pharmaceutical, healthcare, energy and transportation sectors. Would these sectors be trading so well if the market thought we were heading for a recession?
So based on the market reaction to the negative GDP number, investors have concluded that last quarter's GDP is "one and done," a one-time anomaly. Even though stock market returns are not as high as last year, the five year, three-month-old bull market is still well intact.
Some areas of the economy may be losing some steam as evidenced by weakness in consumer stocks, but there is enough strength in the economy to lead me to conclude that recession is not lurking around the corner and that the stock market remains the best place to be.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.