Stocks post solid gains as economy keeps growing

Interest rates have soared. The housing market has weakened. Retail sales tumbled during the holidays. But the head of credit card giant Mastercard isn’t too worried.

“While macroeconomic and geopolitical uncertainty persists, consumer spending has been remarkably resilient,” said Mastercard CEO Michael Miebach in the company’s earnings release Thursday.

Miebach added on a conference call with analysts that consumer “spending patterns have largely normalized relative to the effects of the pandemic with the notable exception of China.”

Shares of Mastercard (MA) fell about 2% in midday trading though. The company’s outlook is a little more sanguine. Chief Financial Officer Sachin Mehra said on the conference call with analysts that the “vast majority” of its markets “are kind of growing and growing at a healthy pace, but they’re not growing at an accelerating pace.” 

Credit card rivals Visa (V), American Express (AXP) and Discover (DFS) all fell slightly Thursday too. So did the stock of Synchrony (SYF), which reported earnings earlier this week and noted that it expected a “mild recession” and rising unemployment rate.

Chevron was the top-performing Dow stock of 2022, surging more than 50% thanks to a spike in crude oil prices. Now, Chevron is looking to further reward its shareholders…but it is not making any friends in Washington as a result.

Chevron announced a $75 billion share repurchase program Thursday. When companies use cash to buy their own stock, it reduces the overall number of shares outstanding and typically leads to an increase in earnings per share as a result. Chevron also boosted its quarterly dividend to shareholders, raising it 6% to $1.51 a share.

Shares of Chevron (CVX) rose nearly 4% on the news.

Companies often tout dividends and buybacks as prudent uses of cash. But many in Washington are annoyed by the fact that oil giants haven’t taken more steps to use their windfall profits to give workers even bigger pay increases or invest in drilling capacity in order to pump more crude to increase supply and meet demand.

White House Assistant Press Secretary Abdullah Hasan took note, tweeting that “for a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it.”

The US economy continues to grow, but small businesses aren’t all reaping the rewards of this expansion. That could be bad news if/when there actually is a recession.

According to data from Torsten Slok, chief economist with Apollo Global Management, about 40% of companies in the Russell 2000 index (which looks at small cap stocks) were unprofitable over the past year.

To put that into context, only about 15% of the companies reported losses over the previous 12 months during the late 1990s…just before the 2001 recession, after the dot-com bubble imploded.

The percentage of companies posting losses spiked in 2001. It did so again during the Great Recession of 2008 and the brief Covid-induced recession of 2020. Slok is concerned that even more small companies will start to bleed red ink if the economy enters another downturn.

“During recessions, the share of unprofitable firms rises. This is not surprising,” Slok wrote, adding that if this trend continues, more than half of the companies in the Russell 2000 could wind up losing money.

If you look at all the data that came out Thursday morning, it’s tempting to come to the conclusion that the US economy is still in pretty good shape. Not so fast, says one market expert.

Raheel Siddiqui, senior investment strategist at Neuberger Berman, said he thinks investors have to dig deeper in the GDP report.

“I live in the world of data,” Siddiqui said. “Today’s data was terrible, but most won’t tell you that.”

Real disposable personal income, for example, fell more than 2% in the fourth quarter from a year ago. That’s a sign of how inflation is impacting consumer spending.

Siddiqui thinks inflation continues to be a problem for the economy… and that the Fed is going to act accordingly to tame it. He believes there is a greater chance of more aggressive rate hikes than the market is willing to admit. Traders are currently expecting a small rate hike next week… a quarter point. But Siddiqui said a half point isn’t out of the question.

“The Fed is hoping that if they continue to raise rates, it will create a negative wealth effect. Spending slows and stocks come down,” he said.

“The Fed is not winning this game, so I would not be surprised if the Fed does a 50 basis point [half-point] hike to make the market take them seriously,” he added. “If I were [Fed Chair Jerome] Powell, it’s something I would consider.”

US stocks rose after the opening bell as investors treated good economic news as good news for the markets. The nation’s economy grew at an annualized pace of 2.9% in the fourth quarter, surpassing consensus forecasts. What’s more, the number of Americans filing for weekly jobless claims continued to fall and durable goods orders rose more than expected.

In corporate news, shares of Elon Musk’s Tesla (TSLA) surged nearly 10% thanks to strong sales and earnings. Software giants IBM (IBM) and SAP (SAP) both fell in early trading. The two tech companies are the latest to announce layoffs.

The Dow gained about 100 points, or 0.3%.

The S&P 500 was up 0.6%.

The Nasdaq Composite rose 1.1%.

The economy grew at a slightly faster pace than expected in the fourth quarter. And jobless claims continued to fall. What’s more, durable goods orders surged. But Wall Street didn’t blink much.

Futures were pointing to a somewhat flat to decent gains for the Dow, S&P 500 and Nasdaq before the economic data deluge. And they were still mostly unchanged afterwards.

It could be that investors realize that this data is backwards looking and is unlikely to change the minds of policy makers on the Federal Reserve all that much. A quarter-point rate hike next week is still the most likely scenario.

But investors are still not sure what the Fed will do next? Market bulls are hoping the central bank will pause…and possibly even begin to cut rates later this year if the economy slows. Still, there is no evidence of a severe slump just yet, particularly since the jobs data remains so strong. That’s why some investors are even predicting a so-called soft landing, in which the economy slows but does not enter a recession.

First-time claims for unemployment benefits fell for the second week in a row to 186,000 for the week ending January 26, according to Department of Labor data released Thursday.

That’s a decrease of 6,000 from the previous week’s revised level of 192,000.

The data comes just days ahead of a Federal Reserve meeting to determine whether the central bank needs to continue to raise interest rates aggressively in order to cool the economy.

The Fed has been hoping for a softening in the labor market, but the steady level of initial claims, which are considered a proxy for layoffs, continue to show that the labor market remains tight.

Initial weekly claims are now at their lowest level since April 2022.

The US economy expanded again during the fourth quarter, registering solid growth even as consumers and businesses battled inflation and historically high interest rates.

Gross domestic product — the broadest measure of economic activity — increased at an annualized rate of 2.9% from October to December last year, according to Commerce Department data released Thursday.

That’s a slowdown since summer, when the economy saw growth of 3.2% in the third quarter — but an improvement on the first half of the year, which showed two consecutive quarters of contraction.

Economists were expecting fourth-quarter GDP to grow at an annualized adjusted rate of 2.6%.

For 2022, GDP expanded 2.1%, according to the Commerce Department report.

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American Airlines, JetBlue and Alaska Air all reported profitable fourth quarters, although JetBlue and Alaska disappointed investors.

JetBlue reported earnings per share of 22 cents, a bit better than the 20 cents forecast by analysts surveyed by Refinitiv. But it also warned it expects a loss of between 35 cents to 45 cents a share, far worse than the forecast of a 4 cent a share loss.

JetBlue also was the first US airline to report a full-year loss. While most airlines enjoyed a return to profitability due to a strong rebound in demand and fares across the industry, JetBlue reported losses in the first half of the year as it wage a bidding war for Spirit Airlines.

American Airlines, which had given bullish guidance for the quarter earlier this month, exceeded the raised expectations, earning $1.17 a share, 3 cents better than forecast and enough to give it a profit for the year.

Alaska Air reported EPS of 92 cents, 2 cents less than forecasts.

Shares of Alaska were narrowly lower in pre-market trading on the miss, while JetBlue was off 1% on its guidance. American shares were up 1%

All airlines had reported losses a year earlier as the surge in Covid cases at that time depressed demand for travel. Those losses continued in the first quarter of 2022. But the industry has been broadly profitable since then, although Southwest reported a large fourth quarter loss earlier Thursday on its December service meltdown.