Blog : As Good As It Gets

by Ed Zwirn on June 26th, 2013

Penny stock investors take note: Things apparently weren't as good as we thought they were in Q1.

In what had been expected to be a sleeper of an announcement, the market for everything from penny stocks to blue chips was taken by surprise today with the release of a third GDP estimate showing first quarter economic growth of 1.8%, a sharp downward revision from the 2.4% estimate already reported for the same period.

Of course, this doesn't mean the U.S. economy is anywhere near the train wreck being experienced by many of its foreign counterparts. The latest Q1 reading is an improvement over Q4 2012's 0.4% growth rate, and therefore shows a slight acceleration.

But what it doesn't show is an economy undergoing rapid economic growth to such an extent that the Fed will want to rein things in. The underlying trends show weakness in all sectors, and this weakness should ensure that the Fed's stimulus programs should continue to boost hot penny stocks. This, after all, was the Catch-22 of the latest round of Fed statements: Bond buying and low target interest rates will be adjusted only after the economy appears in danger of overheating.

Of course, however much it may have boosted the stock market in general, the latest GDP estimate, which reflects lower consumer spending on travel and healthcare than previously thought, might prove problematic for some penny stocks. And one of the bright spots, a growth in spending on utilities, was driven by cold weather and, at least from my point of view, not a positive indicator at all, a higher heating bill being hardly the stuff to make me think I have more spare cash for a penny stock investment.

The upshot for the stock market is a second consecutive rise for the Dow Jones Industrial Average, with today's rise alone more than 150 points, or north of 1%. The rise in Treasury interest rates has also abated for now, with the yield on the 10-year bond just over 2.5%, down more than 2% on the day.

Broader market considerations aside, the outlook for penny stocks can only be improved by the prospect of continuing Fed pump priming and its corollary, low interest rates. The former should ensure a continuing supply of fresh money to chase investments in general, while the latter should boost penny stocks and other speculative vehicles as investors go looking for yield in all the right places.