Finance
Final fourth quarter GDP revised upwards as consumer spending rises
An uptick in consumer spending helped boost U.S. economic growth in the fourth quarter. (iStock)
The third and final estimate for real gross domestic product (GDP) in the fourth quarter of 2023 was revised upwards, showing that the U.S. economy grew at an annual rate of 3.4%, according to the Bureau of Economic Analysis (BEA).
The reading comes just above the BEA’s second GDP estimate for the fourth quarter, which showed the economy increased at 3.2%. The change primarily reflects upward revisions to consumer spending and nonresidential fixed investment.
Real GDP increased at an annual rate of 3.4% for the October-through-December period after rising 4.9% in the third quarter of 2023. Thursday’s final reading comes just under the BEA’s original GDP estimate for the fourth quarter, which showed the economy increased at a rate of 3.3% and beat economic forecasts that anticipated a deceleration of growth over the previous month with the expectation that the economy would expand by a 2% rate.
Economic growth is a crucial metric the Federal Reserve is monitoring as it weighs when it will begin dialing back interest rates. Fed officials have predicted at least three rate cuts this year, with interest rates expected to tick down to 4.6%, according to the central bank’s updated economic forecasts in its Summary of Economic Projections (SEP). Market expectations are that the first rate cut will come in the summer, if not later in the year.
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High rates weigh on consumer wallets
The Fed’s decision to keep interest rates higher for longer puts a strain on consumer wallets and how much they pay to borrow, according to Michele Raneri, the vice president of U.S. research and consulting at TransUnion.
According to a recent TransUnion report, credit card balances surged past the $1 trillion mark for the first time in the fourth quarter of 2023. While Americans charged on their cards, they also increased their unsecured personal loan balances in the fourth quarter. Personal origination balances topped $245 billion, compared to $222 billion the previous year.
“While inflation continues to trend towards more normal levels, today’s decision from the Fed is to hold interest rates at their current levels and that any potential decreases will take place later in 2024,” Raneri said. “This means U.S. consumers who continue to face relatively high-interest rates across a range of credit products will have to wait at least a bit longer for rate relief. When rates do begin falling, the effects throughout the credit industry will be real but will likely be slow to take root.”
Consumers can explore refinancing any high-interest debt into lower-interest credit products to reduce balances once interest rates are brought down, according to Raneri.
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Consumer optimism improving
Despite the economic challenges, consumer confidence hit a record high in March. The University of Michigan’s benchmark Consumer Sentiment Index rose 3.3% in March to a final reading of 79.4, the highest since July 2021, the University of Michigan said in a report.
The number reflects the improved consumer outlook that inflation will continue to soften and that personal finances will also be lifted as the effects of high prices and expenses on living standards ease, the report said.
Consumers may be more optimistic, but the index remains far from its pre-pandemic highs, reflecting the long shadow of high inflation, according to Jim Baird, Plante Moran Financial Advisors’ chief investment officer.
“Consumers are far from ebullient in their assessment of the current state of the economy, their personal financial prospects, and the outlook for the economy further down the path,” Baird said. “The fact that consumer sentiment remains constrained against the backdrop of a robust labor economy, strong wage growth, and above-trend economic growth is a direct reflection of the corrosive effects of surging inflation in recent years.
“Paychecks may have experienced a nice boost in recent years, but when those additional dollars are going right back out the door to cover the rising cost of rent, food, gasoline, personal services, and a host of other expenditures, it’s no surprise that consumers aren’t more upbeat,” Baird continued.
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Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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