MarketView for April 3

 

 

Summary 

 

Stock prices were higher again on Friday, with the Dow Jones industrial average marking its best four-week winning streak since 1933, lifted by positive results from Research in Motion and comments by Fed Chairman Ben Bernanke, who said the Fed will do everything in its power to stabilize the banking system. At Friday's close, the S&P 500 was up 24.5 percent from a 12-year low set on March 9, helped mainly by growing optimism that the economic slowdown is starting to moderate.

 

The Dow closed above 8,000 for the first time since February 9 after four straight days of gains.

At the same time, Wall Street shrugged off the latest jobs numbers, where certainly were not pretty, posting the highest unemployment rate since 1983.

 

Although the numbers were not unexpected, the unemployment rate hit 8.5 percent as employers cut 663,000 jobs in March. If part-time and discouraged workers are factored in, the unemployment rate would have been 15.6 percent in March; the highest on records dating to 1994, according to Labor Department data released Friday.

 

The Nasdaq outperformed other indexes, helped by a 21 percent jump in Research in Motion after the company posted surprisingly strong results on brisk retail demand and gave an upbeat outlook after Thursday's closing bell. RIM closed up 20.8 percent to $59.29, while IBM ranked as the Dow's largest gainer, up 1.4 percent at $102.22.

 

For the week, the Dow rose 3.1 percent, while the S&P 500 advanced 3.3 percent and the Nasdaq rose 5 percent.

 

Financial stocks rose after Bernanke, the Federal Reserve chairman, said the Fed will use "all of its tools" to stabilize markets. Citigroup closed up 4 percent to $2.85, while Bank of America added 5 percent to close at $7.60.

 

The Institute for Supply Management reported that the services sector shrank for the sixth straight month in March as recession-weary consumers tightened their belts.

 

Among the pharmaceutical stocks Johnson & Johnson was down 1.6 percent at $52.15, and Merck fell 2 percent to $26.46.

 

Crude Down

 

Oil prices settled above $52 a barrel on Friday, slightly lower on the day after a report that U.S. unemployment in March soared to a 25-year high. However, optimism that the economy will soon turn around curtailed losses. Crude was up nearly 9 percent on Thursday on hopes that G20 actions would spur an economic recovery.

 

Sweet domestic light crude for May delivery settled down 13 cents per barrel at $52.51. London Brent crude settled up 72 cents per barrel at $53.47.

 

A Forecast We Can Live With

 

The Obama Administration on Friday said they expect the economy to begin turning the corner by the end of the year with job growth coming some months after that.

 

"We'll see positive GPD growth may be the end of year and then it would take a little longer than that to see positive job growth," said Christina Romer, the head of the White House Council of Economic Advisers.

 

"There is a natural lag between the policies that we take and when they can actually effect the economy. As painful as it is to say you have to be a little bit patient, that is unfortunately where we are, she said

 

Service Sector Shrinks for 6th Straight Month

 

An index published by the Institute for Supply Management of purchasing executives, fell to 40.8 last month from 41.6 in February. The services report found that the real estate industry grew in March, while the other 17 industries contracted. Any reading below 50 indicates contraction.

 

The index is based on a survey of the institute's members in 18 industries. It covers such indicators as new orders, employment and inventories. About three-quarters of Americans work in service-providing industries such as hotels, retail, education and health care.

 

Meanwhile, businesses' new orders, which presage any recovery in hiring and production, fell to 38.8 from 40.7 in February. Employment shrank for the 14th time in 15 months, dropping to 32.3 from 37.3 in February. Retailers eliminated nearly 50,000 jobs, professional and business services axed 133,000, and leisure and hospitality reduced employment by 40,000.

 

"Respondents remain concerned about the negative economic outlook and rising unemployment," said ISM survey chair Anthony Nieves, and the services industries continued their steady decline since the first quarter of last year.

 

Even companies known for strong hiring, such as Google, are laying people off. Google last month said it would cut nearly 200 jobs, mostly in advertising sales. Tiffany recently said it planned to shut down its Iridesse pearl jewelry chain, partly because of the recession, while Costco plans to shut down its two home furnishing stores.

 

Survey respondents pinned some hopes on the Obama administration's $787 billion stimulus package, which includes money that will flow to states for public works projects, help them defray budget cuts, extend unemployment benefits and boost food stamp benefits. The administration also is counting on programs to prop up financial companies and reduce home foreclosures to help turn the economy around.

 

Eight of the industry sectors, including real estate, education, finance and insurance, construction and health care, said they expected to benefit from the spending.

 

The business activity index rose to 44.1 last month from 40.2 in February, but that just brought it back to January's level. Only four industries reported growth in that category, including real estate and sectors related to travel, such as food and hotels.

 

It Is Bitter Medicine

 

Acknowledging that it was "extremely uncomfortable" about last year's bailouts of big financial companies, Federal Reserve Chairman Ben Bernanke also reiterated on Friday that the Fed's strategy to ease the financial crisis is working.

 

Bernanke said the central bank was forced to take action because the collapse of those companies would have dealt a serious blow to the financial system and the national economy. The situation underscores the need for new powers to allow the government to safely wind down such huge firms, he said. Bernanke and Treasury Secretary Timothy Geithner recently asked Congress for such powers.

 

Credit provided under those company bailout accounts for only 5 percent of the Fed's $2 trillion balance sheet. Still, "these operations have been extremely uncomfortable for the Federal Reserve to undertake and were carried out only because no reasonable alternative was available," Bernanke said.

 

The Fed's radical programs to end the financial crisis and spur bank lending to consumers and businesses are helping. Its program to provide financial companies with loans, buy mounds of debt that companies rely on for short-terming financing of payrolls and supplies, and efforts to bolster consumer lending and the mutual funds have eased some credit stresses, he said.

 

Such efforts by the Fed, along with central banks in other countries, have "significantly reduced funding pressures for financial institutions, helped to reduce rates in bank funding markets and increase overall financial stability," Bernanke said.

 

Getting banks to boost lending to customers is a key ingredient to any economic turnaround. The Fed chief said he expects to see a "gradual resumption of sustainable economic growth." However, he didn't say when.

 

Bernanke also defended the Fed's decisions to revive the economy by plowing trillions of dollars into efforts to stabilize the banking system and to lower interest rates. Its program to buy mortgage-backed securities of Fannie Mae and Freddie Mac has helped drive down the rate on 30-year mortgages to record lows.

 

"These are extraordinary challenging times for our financial system and our economy," Bernanke said. "I am confident that we can meet these challenges, not least because I have great confidence in the underlying strengths of the American economy."

 

In addition to cutting the Fed funds rate to an all-time low of near zero, the Fed has turned to unconventional tools, such as its recent decision to start buying government debt, to pull down interest rates on a range of consumer loans, the goal being to ramp up consumer spending.