1/27/2012
By Carlos Guillen, Research Analyst

Equity markets were shaken and left slightly in the red during Friday's trading session as economic data showed rather mixed results with better than expected consumer sentiment figures but with worse than forecasted gross domestic product growth.

The University of Michigan Consumer Sentiment January result landed at 75.0, which was higher than the Street's expectation of 74.2, increasing from the 69.9 reached last month, representing the fifth consecutive month-to-month increase, and standing at the highest level since May 2011. This result was also an improvement to the prior Michigan estimate of 74.0. The better than expected reading came as consumers have seen that the employment situation has been improving. The recent gains in equity markets are also serving to fuel confidence as consumer's perceived wealth improves. Clearly, the uptrend in consumer sentiment is very encouraging, but all is still not well. As it stands, consumers remain deeply skeptical about the prospective strength of the economy. While consumers have been seen job improvements, they are not optimistic that this will continue. At the same time, more consumers have reported experiencing income declines, and very few, about one in eight, expect their income to grow faster than inflation.

The real drag on equity markets was the GDP report. While typically this number has a negligible effect on markets, as it is backward looking, the concern has been that inventories have been building at an accelerated rate. Real GDP growth during the fourth quarter of 2011 was measured at 2.8 percent, below the Street's estimate of 3.2 percent, but still higher than the third quarter GDP growth of 1.8 percent. The thing that is frightening investor is that the change in private inventories contributed 1.94 percentage points to total GDP growth. But, why do some consider is this a problem? Well, the concern is that many are skeptical that the build of inventory may be too much for the current demand. So the March quarter may reflect a smaller inventory build that will work against GDP growth. Consumption would have to increase at a much faster rate to make up the difference, and investors are not confident this will happen.

Carlos Guillen
Wall Street Strategies