MarketView for April 14

 

 

 

Summary 

 

Stock prices were higher again on Wednesday as the major equity indexes chalked up their fifth straight day of gains on a combination of stronger-than-expected corporate results and March retail sales. The end result was that the S&P 500 index moved past the 1,200 mark for the first time in 18 months. Dow components Intel and JPMorgan Chase set the pace for the day’s trading activity after both posted better-than-expected results.

 

JPMorgan was the top percentage gainer on the Dow, up 4 percent to $47.73, followed by Bank of America, which is set to report results on Friday and rose 3.9 percent to $19.40. Intel climbed 3.3 percent to $23.52.

 

More shares hit a 52-week high on the New York Stock Exchange than on any day since the end of December 2003. The Nasdaq recorded its greatest number of 52-week highs since January 2004. Although the large number of 52-week highs suggests broad-based buying, momentum indicators also suggest the markets could be overbought.

 

Strong earnings from JPMorgan and Intel and higher trading volume raised investor sentiment after a revenue disappointment from Alcoa kicked off the first-quarter earnings season on Monday. Also adding to the day’s positive sentiment were March retail sales, which rose 1.6 percent, according to a report released by the Commerce Department.

 

Financial and technology sectors led gains on the broad S&P 500, which broke above 1,200 for the first time since September 2008 when Lehman Brothers collapsed. Citigroup gained 6.7 percent to $4.93 and was the most actively traded stock on the New York Stock Exchange.

 

After the market's close, Yum Brands, which operates Taco Bell, Pizza Hut and other restaurant chains, reported adjusted first-quarter earnings that beat expectations, sending the stock up 2.9 percent to $42.89 in after-hours trading.

 

Earnings are also due this week from Google, which was up 0.4 percent to $589, and General Electric, up 2.1 percent to $19.35. GE is up more than 4 percent so far this week.

 

Economic activity strengthened in most regions in March and early April, except for St. Louis where plans to close several plants were announced, the Federal Reserve said in its Beige Book.

 

Energy stocks advanced after a surprise fall in U.S. crude inventories, a positive sign for demand that sent May crude futures up 2.3 percent to $85.99 per barrel. ConocoPhillips gained 2.2 percent to $56.89.

 

A note from analysts at Jefferies Equity Derivatives said the gap between implied volatility and realized volatility suggests investors are bracing for a more volatile market. The Volatility Index .VIX, down 2.8 percent, is at its lowest since 2007.

 

Economic Outlook Continues to Improve

 

Retail sales exceeded expectations in March and firming demand led businesses to rebuild inventories to a seven-month high in February, suggesting a broadening economic recovery.

The retail sales report on Wednesday painted a picture of consumer resilience in the face of high unemployment and tight access to credit. The data offered hope the manufacturing-led recovery would continue when the boost from government stimulus and the rebuilding of inventories ebbs.

 

Total retail sales rose 1.6 percent, the largest increase since November as consumers stepped up purchases of vehicles and a range of goods, the Commerce Department said. January sales were revised up to a 0.5 percent rise from 0.3 percent.

 

With domestic demand strengthening, businesses have restarted to rebuild inventories from record low levels. Business inventories increased 0.5 percent in February, the largest advance since July 2008, to their highest level in seven months, the Commerce Department said in a second report.

 

Fed Chairman Ben Bernanke told Congress he too thought domestic demand was moving onto firmer footing though he cautioned the economic recovery was only a moderately paced one.

Describing the recovery from the worst downturn since the Great Depression as moderate, Bernanke reiterated the Fed's commitment to very low interest rates.

 

"There is a pretty broad view that we are seeing some building momentum in final demand. Consumer spending looks to be picking up," Bernanke told the Joint Economic Committee of Congress on Wednesday. The U.S. dollar fell after Bernanke gave no new guidance on interest rates.

 

A separate report from the Labor Department showed no signs of inflation pressures, which should help the Fed honor its pledge to keep its benchmark interest rate unusually low for an extended period.

 

Consumer prices rose 0.1 percent last month after being flat in February. Excluding volatile food and energy prices, core inflation was unchanged in March after rising 0.1 percent the prior month. The economy's improving tone was also captured in the Fed's Beige Book, which showed strengthening activity in most regions of the country during March and early this month.

 

Growing confidence in the recovery, particularly brightening prospects in the job market, is encouraging households to tap into their savings to fund purchases of goods, including luxury items.

 

Retail sales in March were buoyed by a 6.7 percent rebound in motor vehicle and parts purchases. Excluding motor vehicles and parts, retail sales rose 0.6 percent in March after rising 1.0 percent the prior month as a combination of an early Easter holiday and warm weather boosted receipts at clothing stores.

 

Core retail sales, which correspond most closely with the consumer spending component of the government's gross domestic product report, rose 0.5 percent after increasing 1.2 percent February. Analysts said this bode well for first-quarter gross domestic product growth.

 

Consumer spending, which normally accounts for about 70 percent of U.S. economic activity, increased at a 1.6 percent annual rate in the fourth quarter. The economy expanded at a 5.6 percent rate in the last three months of 2009.

 

Retailers reported growth in sales across a broad spectrum of categories, with the exception of gasoline stations and electronics and appliances stores.

 

Beige Book Indicates Stronger Economy

 

Economic activity strengthened in most regions during March and early April with the exception of St. Louis, where plans to close several plants were announced, the Federal Reserve said on Wednesday.

 

"Overall economic activity increased somewhat ... across all Federal Reserve districts except St. Louis, which reported 'softened' economic conditions," the Beige Book summary prepared by the Minneapolis regional Fed bank said.

 

The Beige Book, so named for the color of its cover, is an anecdotal collection of reports from all 12 Fed districts. The latest one is based on information collected before April 5 and will be used by central bank policymakers when the Federal Open Market Committee meets April 27-28 to mull monetary policy.

 

Retail sales and sales of new cars and trucks rose in most areas and many areas said housing activity increased, though from very low levels. Notably, commercial real estate market activity remained "very weak" across the country. The Beige Book's tone underlined the muted nature of the economic recovery.

 

"While labor markets generally remained weak, some hiring activity was evident, particularly for temporary staff," it said. "Wage pressure were characterized as minimal or contained."

 

According to the Beige Book, loan volumes and credit quality decreased in most parts of the country last month and described banking and financial sector performance as mixed.

 

On a more positive note, it said manufacturing was stronger nearly everywhere except in the St. Louis district and new orders showed a pickup. The St. Louis Fed said there were more plant closings and layoffs than there were openings and hires.

 

"Firms in the construction materials, auto parts, and food and beverage manufacturing industries announced plans to close a plant in the district," the St. Louis Fed said.