Why are Stocks Flat After the GDP Report?

In a somewhat surprising manner, stocks across the board are relatively flat after the negative gross domestic product report. In afternoon trading, all three major indices were barely unchanged from prior day closings. Silver linings are trying to be found about the economy contracting in the fourth quarter, but all eyes are on the Federal Reserve.

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On Wednesday, the first reading on the nation’s GDP, the volume of all good and services produced, “unexpectedly” dropped to a 0.1 percent annual rate, according to the Commerce Department. The contraction in the final three months of 2012 is the first in three and a half years. The median forecast of 83 economists surveyed by Bloomberg expected a 1.1 percent gain in GDP. Meanwhile, economists surveyed by Dow Jones Newswires had expected a 1.0 percent growth rate.

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Government spending cuts and slower inventory growth reduced fourth quarter’s GDP by 2.6 percentage points. In fact, federal spending posted the largest drop in about 40 years. Spending on all government levels dropped 6.6 percent in the quarter. Consumer spending increased at a 2.2 percent rate, but the overall report was still weak.

It’s all about the Fed days…

The recent GDP report gives the Federal Reserve more cover to maintain its loose monetary easing policies. On Wednesday, Federal Reserve officials conclude their two-day Federal Open Market Committee meeting. The central bank will likely maintain its current stance, which includes two quantitative easing programs amounting to $85 billion per month, in addition to record low interest rates for the 34 consecutive meetings.BenBernankeMiddleFinger

The market tends to perform well when the Federal Reserve steps into the spotlight. Since the central bank implemented its zero interest rate policy on December 16, 2008, Fed days account for more than 30 percent of the market’s gains.

According to Bespoke Investment Group, a market research firm, the S&P 500 has gained about 73 percent since the first ZIRP meeting. However, the one-day change on all Fed days since then have a cumulative gain of 23.7 percent, representing 32.2 percent of the total gain. Furthermore, the S&P 500 has only declined on a third of Fed days, with pullbacks in excess of 1 percent occurring only four times.

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