Why the Dow Is Up 150 Points

Blue-chip stocks are rallying today despite news that first-quarter gross domestic product was revised downward by the Department of Commerce. With roughly an hour left in the trading session, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up by 153 points, or 1.02%.

When economic statistics are released by the government, they are often subsequently revised. And sometimes those revisions can be quite substantial -- much like today's final GDP number. The Commerce Department first estimated that GDP had grown by 2.5%. It followed that up with a second estimate of 2.4%. And now it says output expanded by only 1.8%. The reason? According to the official press release (link opens PDF), "The increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined."

Given this news, you may be wondering why stocks are rallying today. Shouldn't slower economic growth translate into lower asset prices?

Normally, of course, the answer would be yes. But these aren't normal times. 

The big question on investors' minds right now is whether and when the Federal Reserve will begin to taper its support for the economy. The Fed has intimated on multiple occasions over the past month that it's considering paring down its asset purchases. The catch, however, is that the economy must be improving in order for the Fed to actually pull the trigger. According to its most recent policy statement (emphasis added), "The Committee will closely monitor incoming information on economic and financial developments in coming months [and] will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability."

As a result, bad news from an economic perspective could well be interpreted as good news for asset prices, as it may encourage the central bank to stay the current course.

In terms of individual stocks, Alcoa (NYSE: AA  ) is one of the few blue-chip stocks in the red today, down by 2.4% late in trading. As my colleague Dan Caplinger noted this morning, the aluminum manufacturer is buckling under the weight of falling commodity prices. Gold and silver are both at three-year lows, thanks to the uncertainty of central-bank policies. In addition, inflation continues to be muted, which is largely to blame for the downward trend in commodity prices.

Meanwhile, one of the top-performing stocks on the Dow is Microsoft (NASDAQ: MSFT  ) , up by 2.1% following the company's release of an update to its Windows 8 platform. The adjustments are said to be aimed at addressing "some of the gripes people have with the company's flagship operating system." In addition, as fellow Fool Dan Carroll discussed, Microsoft has entered into an agreement with foreign mobile giant Telefonica to promote Windows phones in places like Germany, Brazil, and Spain.

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  • Report this Comment On June 26, 2013, at 3:36 PM, blackfalcon59 wrote:

    Seriously; stocks are going back up because they never should have gone into a free fall in the first place over a simple comment from the Fed. Stock prices should be based on tangible measurable performance factors. Wall Street is such a ridiculous fantasy land! Is there no common sense in the world any more?

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