Morning Dow Report: Why a Stronger GDP Isn't Saving Stocks

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Bearish investors looked poised to win another battle in the stock market today, as the Dow Jones Industrials were down 38 points as of 11 a.m. EST in what could become the average's fifth-straight losing day. The decline comes despite an upward revision in the government's data on U.S. gross domestic product, indicating a faster 3.6% pace of growth rather than the initial estimate of 2.8%. Yet what sounds like good news isn't sending stocks upward, as financial stocks JPMorgan Chase and Goldman Sachs are both down more than 1%. Even General Electric is down on the day against a small rise for industrial rival Caterpillar .

For financial stocks, all good news about the economy comes with the accompanying threat of higher interest rates. Although the Federal Reserve has promised to take a slow pace in stepping back from the highly accommodative stance it has taken on monetary policy, investors still fret that the inevitable reduction in bond-buying activity could increase interest rates. JPMorgan Chase has huge exposure to rising rates in its bond investment portfolio, while rising rates makes it harder for Goldman to get bond-underwriting clients to float new financing issues, cutting its revenue. In particular, the investment bank's high share price gives it substantial weight in the Dow and could create a greater drag on the average than other financial stocks have in the past.

Meanwhile, you'd expect economically sensitive stocks like General Electric and Caterpillar to benefit more on stronger GDP news. The problem, though, is that U.S. growth is only one component in the equation for both of these industrial giants. Caterpillar's weakness has largely stemmed from sluggish levels of activity in China, and while growth hasn't disappeared from the emerging markets it has ramped down in intensity by a substantial margin. Similarly, General Electric needs stronger global activity in its key energy and aerospace businesses in order to thrive, and rising GDP figures linked largely to inventory gains won't succeed in producing more of that growth.

As a result, focusing too much on GDP will lead you to draw incorrect conclusions about the direction of the economy. With the Fed having so much influence, even favorable numbers don't always produce favorable returns for investors.

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Fool contributor Dan Caplinger owns warrants on JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of General Electric and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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