Stocks lose steam in afternoon trading even after GDP report shows fastest growth in 6 years

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Stocks pare gains even as GDP surges 5.7 percent

NEW YORK — Stocks gave up their gains and were narrowly mixed Friday afternoon as investors questioned the economy’s ability to sustain a big fourth-quarter growth rate. Disappointing earnings at technology companies pulled stocks down from an early gain.

The market was heading toward a loss for January on the last trading day of the month.

The Commerce Department said gross domestic product, the broadest measure of the economy, expanded at an annual rate of 5.7 percent during the fourth quarter, easily topping forecast of 4.5 percent. The strong GDP growth, coupled with an upbeat report on manufacturing in the Midwest, reassured investors that the economy is continuing its recovery.

However, the report also raised questions about the sustainability of a recovery. Most of the fourth-quarter growth came from companies replenishing low inventories. Rebuilding inventories tends to create just a temporary bump in economic growth.

“The GDP report looks shiny and new on the surface,” said Alan Gayle, senior investment strategist for RidgeWorth Investments. “But once you open up the hood, you start to see its not as great as on the outside.”

Michael Sheldon, chief market strategist at RDM Financial Group said that the report “is going to leave doubts” in the minds of investors who are looking for consistent economic improvement.

Questions about the recovery just add another concern to market that has halted a 10-month rally. Investors were already uneasy after China said it was trying to limit its economic growth and President Barack Obama announced plans for a major overhaul of banking regulations. Shares have fallen sharply since hitting a 15-month high last week.

In afternoon trading, the Dow rose 42.85, or 0.4 percent, to 10,163.31. The Standard & Poor’s 500 index rose 1.40, or 0.1 percent, to 1,085.93, while the Nasdaq composite index fell 4.13, or 0.2 percent, to 2,174.87, lagging the other indicators following a disappointing earnings report from Microsoft Corp.

The Chicago Purchasing Managers Index rose more than expected, providing some evidence the manufacturing sector, at least in the Midwest, is rebounding as well. The Chicago PMI climbed to 61.5 in January from 58.7 last month. Economists were expecting a reading of 57.5 for January.

The Chicago report is seen as a precursor to the national Institute for Supply Management report that is due out Monday.

While the economic news was somewhat reassuring, the market is still wary about government plans to increase the regulation of banks. Obama’s calls last week to restrict the size of banks and to limit risky trading by big financial institutions helped spark the sell-off in stocks. Since first announcing the plan, Obama has provided few specifics about how far the restrictions would go in limiting bank trading.

“Political uncertainty always gets people nervous,” said Peter Zuger, co-portfolio manager of the Touchstone Mid Cap Value fund.

The unknowns coming out of Washington have helped stall the rally that sent the S&P 500 up 60.3 percent. But one political worry was put to rest Thursday when Federal Reserve Chairman Ben Bernanke won Senate confirmation for a second term.

Investors are also concerned about the Chinese government trying to limit rapid growth in that country. China has forced banks to hold more money in reserve as it looks to curb lending to avoid speculative bubbles and inflation.

A potential slowdown in China’s growth has hurt the stocks of U.S. companies that rely heavily on exports.

The market’s recent retreat has more than offset gains seen earlier in the month, which could be a sign for how the rest of the year will unfold for stocks. Since 1950, the S&P 500’s full-year direction has matched its January performance more than 90 percent of the time, according to the Stock Trader’s Almanac.

Advancing stocks outnumbered decliners by about 6 to 5 on the New York Stock Exchange, where volume came to 522.1 million shares, compared with 443.2 million traded at the same point Thursday.

Fourth-quarter earnings reports continued, and extended the pattern of mixed results among the companies that have already reported.

Microsoft said late Thursday it beat analysts’ expectations, but the company reported slow spending on software by corporations. Analysts say companies can no longer get by just beating expectations; they need to show revenue growth and signs of future strengthening.

The company’s stock fell 59 cents, or 2 percent, to $28.57.

It was the second straight day worries about technology companies’ outlooks hurt the market.

Bond prices dipped Friday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.65 percent from 3.64 percent late Thursday.

The dollar rose against other major currencies, while gold prices fell. The dollar has been strengthening as concerns remain about sovereign debt in Europe, especially Greece.

The Russell 2000 index of smaller companies rose 2.05, or 0.3 percent, to 609.98.

Overseas markets were mixed. Asian stocks stumbled on disappointing company forecasts and Toyota’s recall of millions of cars, while Europe’s major indexes rose following a report that showed inflation remained relatively benign in the 16 countries that use the euro and the strong U.S. GDP report. Low inflation paves the way for the European Central Bank to keep its key interest rate as a historic low of 1 percent.

Japan’s Nikkei stock fell 2.1 percent, while Hong Kong’s Hang Seng dropped 1.2 percent. Britain’s FTSE 100 rose 0.8 percent, Germany’s DAX index gained 1.2 percent, and France’s CAC-40 climbed 1.4 percent.