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What Lackluster GDP Means for Your Stocks

After stalling to just a 0.4% growth rate in the fourth quarter, U.S. GDP growth accelerated in Q1. However, the 2.5% annual rate was much slower than the 3% forecast. And when you back out inventory growth, the rate was a disappointing 1.5%.

A few dispiriting details include:

  • Fixed investment and equipment/software saw 13.2% and 11.8% growth, respectively, last quarter. In Q4, nonresidential fixed investment was up just 2.1% and equipment and software spending increased just 3%.
  • There was a smaller decrease in federal spending on the quarter, but still a decrease of 8.4%.
  • Personal income decreased 3.2% vs. an 8.1% increase in Q4.

This could signal trouble for stocks as we enter summer. We’ve already seen other troubling economic signs — soft China data, signs of a consumer slump and an earnings season characterized by a strong bottom line but a tepid top line for blue chips.

So what moves should investors make?

Well, I for one would not be dabbling in enterprise tech right now based on the continued trend of sluggish business spending. Oracle (NASDAQ:ORCL) is slightly in the red this year and IBM (NYSE:IBM) is barely breakeven, and I wouldn’t expect that to change without a boost to corporate IT spending trends. Oracle issued weak earnings results at the end of March and insisted they were largely because of sales execution, but it’s hard to think that the bigger picture isn’t also a significant drag.

I also would be skeptical of consumer discretionary plays. The Consumer Discretionary SPDR ETF (NYSE:XLY) is indeed up 15% year-to-date thanks to high-fliers like Home Depot (NYSE:HD), Disney (NYSE:DIS) and Nike (NYSE:NKE). But there could be softness to come, and it might be time to take some profits off the table if you’re a shorter-term trader. At the very least, consider reallocating and rebalancing your portfolio, taking partial profits in big winners of 2013’s first few months.

As for purchases, it seems like “risk off” is again in favor. Coca-Cola (NYSE:KO) is up against an all-time high (split-adjusted), racing up 6% in the past month alone. And stolid cereal giant General Mills (NYSE:GIS) and paper products king Kimberly-Clark (NYSE:KMB) are both up over 22% year-to-date. These stable dividend payers might be a good place to hide out.

Of course, there’s no reason this one report alone will sink the rally. Sometimes GDP is a good news-bad news kind of thing.

Continued weakness in the American economy could signal continued bond buying and ZIRP at the Federal Reserve. After all, it was some ugly economic data out of Europe that seems to be goading the European Central Bank into making more stimulus available for the continent.

But hoping for bad headlines just to keep the Fed pumping money into the American economy is not a sustainable plan. The only way for corporations to grow and prosper in the long run is for the American worker and consumer to prosper, too.

I remain convinced that there are many disappointing factors weighing on the markets right now. And while we might not go over a cliff and see a 10% decline, it’s prudent to get defensive after these GDP numbers echo the softness in other data.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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