MarketView for April 28

Summary 

The Dow Jones transportation average closed at an all-time high of 5,510 on Thursday, leading the other indexes higher and signaling more gains due to its role as a touchstone of economic demand. The best performer within the index was Norfolk Southern, which jumped 8 percent to $73.87 after reporting strong results. There were expectations that the day would see the indexes move higher after the S&P 500 broke through resistance at 1,344 on Tuesday. However, with overall volume weak and economic data suggesting a still unsteady path to recovery, it raises questions as to how fast the S&P can surpass the next milestone at 1,400. About 7.49 billion shares changed hands on the three major exchanges, slightly below the daily average of 7.73 billion shares.

There were also some signs of creeping cost pressures in some companies' results. Procter & Gamble lowered the high end of its profit forecast as it trimmed expenses and increased prices to offset rising materials costs. Its shares were up 0.8 percent at $64.50. Earnings eased the blow from a batch of soft economic data showing economic growth had slowed and the labor market may be weakening. However, the Fed has maintained support for its easy monetary policy, which has helped push up equity prices in the face of increasing inflation.

After the closing bell, Research in Motion fell 10 percent to $50.94 after the company cut its earnings outlook for the current quarter. At the same time, Microsoft fell 2 percent to $26.19 after posting quarterly earnings. Insurers moved higher as Allstate, up 5.7 percent at $33.76, and Aflac, up 5 percent at $57, advanced on quarterly results. Aetna gained 4.2 percent to $41.48 following quarterly results that exceeded Wall Street's expectations.

Silver rose to an all-time high and gold rose to another record, as a falling dollar and signs that the Federal Reserve would maintain a loose monetary policy raised the precious metals' appeal as a hedge against inflation and economic uncertainty.

Other economic data showed pending sales of existing homes were much stronger than expected in March, offering faint glimmers of hope for the depressed U.S. housing market.

Growth Slows in First Quarter

Economic growth fell in the first quarter as higher food and gasoline prices dampened consumer spending and sent inflation upward at its fastest pace in 2-1/2 years. Another report on Thursday showed a surprise jump in the number of Americans claiming unemployment benefits last week, which could cast a shadow on expectations for a significant pick-up in output in the second quarter.

Growth in gross domestic product slowed to a 1.8 percent annual rate after a 3.1 percent fourth-quarter pace, the Commerce Department said. With much of the pullback traced back to sharp cuts in defense spending and harsh winter weather, analysts were hopeful the economy would regain speed in the second quarter. The drop in defense spending was seen as temporary.

The good news is that consumer spending and business outlays on software and equipment, were not as weak as had been feared, which suggested a foundation for stronger growth was in place. Consumer spending accounts for about 70 percent of U.S. economic activity.

While a 25,000 rise in claims for state jobless benefits to 429,000 last week hinted at some weakening in the labor market, analysts cautioned against reading too much into the gain. They said severe weather in some parts of the country and the Easter holiday could have distorted the figure.

The weak GDP report and the Federal Reserve's stated commitment to a loose monetary policy stance after a two-day meeting on Wednesday drove the dollar to a three-year low against a basket of currencies. The Fed on Wednesday trimmed its growth estimate for 2011 to between 3.1 and 3.3 percent from a 3.4 to 3.9 percent January projection.

Optimism the economy would find a firmer footing in the second quarter was bolstered by a report showing pending sales of previously owned homes rose 5.1 percent in March. Housing is struggling to recover and is one of the headwinds facing the economy.

Growth in the first quarter was curtailed by a sharp pull back in consumer spending, which expanded at a rate of 2.7 percent after a strong 4 percent rise in the fourth quarter. Rising commodity prices meant consumers had less money to spend on other items. Gasoline prices remain a concern, even though they are expected to stabilize somewhat.

The GDP report underscored the pain that strong food and gasoline prices are inflicting on households. An inflation gauge contained in the report rose at a 3.8 percent rate -- the fastest pace since the third quarter of 2008 -- after increasing 1.7 percent in the fourth quarter. A core price gauge, which excludes food and energy costs, accelerated at a 1.5 percent rate, the fastest since the fourth quarter of 2009 and up from 0.4 percent in the fourth quarter. The core gauge is closely watched by Fed officials, who would like to see it closer to 2 percent.

In the first quarter, restocking by businesses picked up, with inventories increasing $43.8 billion after a $16.2 billion rise in the fourth quarter. However, the buildup was less than economists had expected and some said they looked for further inventory building to bolster growth in the second quarter. Inventories added 0.93 percentage point to first-quarter GDP growth. Excluding inventories, the economy grew at a pedestrian 0.8 percent pace after a brisk 6.7 percent rate in the fourth quarter.

Business spending on equipment and software gained pace, but government spending suffered its deepest contraction since the fourth quarter of 1983. Home building made no contribution, while investment in nonresidential structures dropped at its quickest pace since the fourth quarter of 2009, likely the result of bad weather.