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Stocks Climb on GDP Reading in 2Q

Posted on: Friday, 27 August 2004, 06:00 CDT

NEW YORK - A sluggish gross domestic product reading was nonetheless better than expected, prompting investors to send stocks moderately higher Friday on hopes that the economic slowdown would not be as bad as first thought.

The 2.8 percent GDP growth in the second quarter, a revision from the 3 percent preliminary figure reported in July, is a far cry from the 4.5 percent growth in the first quarter. However, the figure was slightly better than the 2.7 percent expansion economists had forecast.

That gave investors hope that this week's drop in oil prices could spark stronger economic growth for the current quarter. Still, with the Republican National Convention next week and traditionally slow trading in August, volume on the major markets remained extremely low, and any boost in stocks would be seen as tentative at best, analysts said.

"This is really anemic," said Chris Johnson, director of quantitative analysis at Schaeffer's Investment Research in Cincinnati. "That's letting a bit of volatility come into the market, but so far this week, it's been on the upside. So when everyone comes back in September, at least we'll be working in a slightly higher market."

In late afternoon trading, the Dow Jones industrial average was up 34.15, or 0.3 percent, at 10,207.56.

Broader stock indicators were modestly higher. The Standard & Poor's 500 index was up 4.34, or 0.4 percent, at 1,109.43, and the Nasdaq composite index gained 12.67, or 0.7 percent, to 1,865.59.

All three major indexes were poised to end the week higher for the second straight week.

Economists said the second quarter GDP growth was hampered by rising oil prices, which the Commerce Department said kept many consumers from spending as much on goods and services. The GDP growth was also restrained by the nation's ballooning trade deficit, which showed that what money consumers were spending was heading to overseas companies.

Consumer belt tightening was echoed in the latest consumer sentiment index reading from the University of Michigan. The index stood at 95.9 in August, down from 96.7 in July. After crude oil prices pushed past $49 per barrel last week, however, prices have retreated, giving investors hope that consumers would start spending again. The October contract for light crude was trading at $43.17 per barrel, up 7 cents, on the New York Mercantile Exchange on Friday.

Falling oil prices have also given corporate America reason to hope after a weaker second quarter. The Commerce Department reported that after-tax corporate profits fell $11.3 billion in the second quarter, as compared to the first quarter. Profits were still up 17.9 percent year over year.

Investors also weighed a warning from Federal Reserve chairman Alan Greenspan, speaking in Jackson Hole, Wyo., that the country would face severe hardships if Medicare and Social Security benefits to baby boomers aren't curtailed.

"It's such a mix of news today, and that really doesn't help us out," said Scott Wren, equity strategist for A.G. Edwards & Sons. "There's no clarity in terms of inflation, with the oil prices and GDP, and there's really not much clarity in terms of earnings growth."

Chattem Inc., maker of consumer healthcare and hygiene products, rose $1.53 to $30.45 after it boosted its third-quarter earnings outlook and reduced its estimate of settlement costs related to class-action lawsuits over its Dexatrim diet pills.

Microchip equipment maker Novellus Systems Inc. lowered its earnings and sales estimates due to low demand, prompting Lehman Brothers to cut its second-half estimates for the company. Novellus was nonetheless up 69 cents at $25.34.

Pharmaceutical company Chiron Corp. tumbled $3.83 to $43.66 after it said deliveries of flu vaccines would be delayed due to contamination issues. The news led brokerages Deutsche Bank and Robert W. Baird to cut their ratings on the company.

Advancing issues outnumbered decliners by nearly 2 to 1 on the New York Stock Exchange, where volume came to just 645.68 million shares, compared with 777.53 million at the same point on Thursday.

The Russell 2000 index of smaller companies was up 4.60, or 0.8 percent, at 551.85.

Overseas, Japan's Nikkei stock average rose 0.7 percent. In Europe, Britain's FTSE 100 closed up 0.8 percent, while Germany's DAX index and France's CAC-40 both gained 0.5 percent.

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