BUSINESS

Dow closes above 18,000 for first time on powerful growth in GDP

Economic news fuels an already strong market

Stocks climbed to record highs Tuesday, with the Dow Jones industrial average closing above the 18,000-point mark for the first time, as investors cheered news that the U.S. economy grew at a staggering 5% rate.

Global stocks rose almost immediately on the Commerce Department's announcement of surprising strength in the U.S. economy, with the Dow leading what ended up as a broad-based but modest rally. The blue chips climbed 64.73 points on the day, or 0.3%, to 18,024.17, closing for the first time past the symbolically significant threshold.

Stocks, particularly in the U.S., had been building momentum in recent days as investors absorbed the implications of relatively cheap oil and steady U.S. job growth. The economic recovery was already perceived to be durable when forecasters were calling for gross domestic product growth in the already strong 3.5% range.

The actual GDP figure released Tuesday provided the market with more fuel.

Stocks rose across the board. The broad-based Standard & Poor's 500 index was up 3.63 points, or 0.2%, to 2,082.17, while the Russell 2000, made up of small-company stocks, was mostly flat, rising 0.69, or 0.1%, to 1,202.54. Stocks in Europe also rose, with markets in Germany and Britain up marginally, and France's CAC 40 rising 1.5%, or 60.54, to 4,31497 in Tuesday's trading.

Investors have been warily watching the Federal Reserve, which has indicated that it would raise short-term interest rates sometime next year to fend off inflation as the economy heats up.

Many on Wall Street expect the hike to take place at the Federal Open Markets Committee meeting in June, or even later, on the belief that Fed Chairwoman Janet Yellen and a majority of the committee will be cautious in raising rates until labor markets have more fully recovered. Morgan Stanley, for instance, has estimated that a rate hike wouldn’t come until January 2016.

The market’s relatively muted reaction to Tuesday morning’s huge GDP surprise can be partly traced to investor fears that it will push the Fed to move up its rate-hike timetable to earlier in 2015.

Robert Johnson, director of economic analysis for Chicago mutual-fund research firm Morningstar Inc., said the most encouraging aspect of the GDP report was the strong contribution made by consumer spending, which accounts for about 70% of GDP. “Consumers are the front engine for all of this,” he said.

He said the market rose only modestly on the strong GDP report because stocks had already been surging in recent days on stabilizing oil prices and news that the Federal Reserve would be patient in raising interest rates. “We’ve already been on multi-day tear,” he said.

Also, analysts don’t expect economic growth to remain at such a high level. Imports, a drag on GDP, are expected to tick up on the increased consumer spending. And exports are likely to fall after an anomalously high quarter fueled in part by fluctuations in commodities prices. Johnson said that the fourth quarter should see growth closer to 3%, and that the Fed is unlikely to use the strong third-quarter figure as a reason by itself to raise rates sooner than expected.

Twitter: @deanstarkman

Copyright © 2016, Los Angeles Times

UPDATES

1:20 p.m.: This article has been updated with closing stock prices.

9:25 a.m.: This article has been updated with comment from Morningstar analyst Robert Johnson.

8:03 a.m.: This article has been updated with analysis about the Federal Reserve.

This article was originally published at 7:47 a.m.

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