US markets surged today, with the Dow gaining 263 points or 1.6%, the Nasdaq gaining 41 points or 0.97%, and the S&P 500 gained 24 points or 1.29%. Among the other markets oil was up a few ticks, gold was down, and 10-year Treasury yields were up. Overall, the Dow and S&P finished the week down 1% and the Nasdaq was down 0.4%, which is the fourth consecutive week of declines.
Equities rose today due to better-than-expected earnings and economic reports. Among the news were better than expected housing starts and consumer sentiment readings above expectations. Previous days’ declines were driven by a number of fears, among them the fear that the significant drop in oil prices over the past few months will negatively impact the economy. Behind that is the worry that the low prices will curb capital expenditures by energy companies and this will drag down GDP.
As our friends over at Deutsche Bank have pointed out, reduced energy sector capex spending due to sustained low oil prices will only reduce inflation-adjusted GDP by about a tenth of a percent. Not too significant. Oil and gas-related investment spending is only about 10% of total non-residential investments in equipment and structures, and this segment represents only about 9% of total GDP. Thus, we are talking about a reduction in 10% of 9% of the whole. Furthermore, reduced oil prices has a positive effect on consumer spending and this will more than outweigh the effect of any reduced capex spending by the energy industry. By digging into the numbers this way we can clear out some of the noise created by the whipsaw actions of the markets and the attendant increased volatility, and we continue to have an overall positive outlook for the US economy and for equities.
Next week there is a full calendar of economic data to watch. Tuesday brings us the Existing Home Sales report. On Wednesday there is the Consumer Price Index report. Thursday is Jobless Claims, and Friday is the report on New Home Sales.