MarketView for April 29

Summary 

The Dow Jones industrial average ended the month with a serious gain, due in no small part to the strength from Caterpillar and other industrials, resulting in the best monthly showing for the Dow Jones industrial average and the Nasdaq since last December. However, volume was light with about 7.17 billion shares changing hands on the major exchanges; a number that was below the daily average of 7.72 billion shares.

The blue-chip Dow average climbed 4 percent for the month while the S&P 500 rose 2.8 percent and the Nasdaq gained 3.3 percent. Caterpillar led the way after reporting a fivefold increase in profit and raising its full-year forecast. The shares were the top performer on the Dow, advancing 2.5 percent to $115.41, after reaching an all-time high of $116.25 during the session. Caterpillar is up more than 20 percent so far this year, along with Boeing.

For the week, the Dow rose 2.4 percent, the S&P 500 gained 2 percent and the Nasdaq advanced 1.9 percent.

Concerns that the market would pull back after earnings were somewhat offset by favorable corporate outlooks and expectations for continued easy money policies from the Federal Reserve that have fueled runs in speculative assets. Nonetheless, April's gains were limited by slides in Microsoft, the Nasdaq's most heavily traded stock, and Research in Motion.

Microsoft fell 3 percent to $25.92 and was the largest drag on the blue-chip Dow after it reported a drop in quarterly sales of its Windows software, mirroring a recent downturn in demand for personal computers. Research in Motion fell 14 percent to $48.65 after the company reduced its first-quarter forecasts.

Merck reported higher-than-expected quarterly earnings, fueled by strong sales of drugs for diabetes, asthma and rheumatoid arthritis, while Chevron reported a jump in earnings as oil prices surged. Merck end the day up 0.45 percent to $35.95 while Chevron added 0.6 percent to close at $109.44. Both stocks are Dow components.

Robust corporate earnings, ample liquidity from the Federal Reserve and the prospect of ultra-low interest rates for the rest of the year have sparked bullishness, pushing the Nasdaq to a 10-year high and lifting the S&P 500 more than 8 percent this year. The major U.S. stock indexes also hit new yearly highs during the week.

The rebalancing by Nasdaq of its benchmark Nasdaq 100 index .NDX will take place on May 2, in which the exchange said it will cut the weight of 82 securities to bring them more in line with their market capitalizations. Apple will see its weighting dropping to 12.3 percent from 20.3 percent.

With May, the market is heading into a typically weak period. May has been the fourth-weakest month for the Dow, averaging a 0.2 percent gain since 1950, according to the Stock Trader's Almanac. It also normally marks the start of the worst six months of the year for the industrials.

Patience Says Fed

The economy is not fully recovered from its deep recession, with housing still weighing on growth, Federal Reserve Chairman Ben Bernanke said on Friday in a speech spelling out ways the U.S. central bank has studied lower income communities.

"Our economy is far from where we would like it to be," he said in prepared remarks to a conference.

The economy grew at a sluggish 1.8 percent annual rate in the first three months of the year, but unemployment is still at a lofty 8.8 percent. The depressed housing market is holding back the economic recovery, Bernanke said. Home foreclosure rates remain high and many families find themselves owing more for their homes than the homes are worth.

"Obviously, the problems in the labor market and the housing market are not unrelated," he said.

The Fed chairman said Fed research shows loans to individuals and businesses through community development financial institutions can boost economic activity. That business generates tax revenues that permit government spending in ways that benefit these communities, he said.

"We at the Federal Reserve will remain closely attuned to the economic health of all communities, including low- and moderate-income communities," Bernanke said.

With rising prices fueling concern about inflation, the Fed is under some pressure to tighten policy after unprecedented and aggressive easing measures. Several Fed officials believe the central bank should act quickly to pare its bloated balance sheet and other major central banks around the world have begun to raise interest rates in response to price pressures.

However, the Fed made clear through a statement and a press conference by Bernanke on Wednesday that with a high jobless rate, extensive lost wealth, and inflation levels still not much higher than historic lows, the central bank has no immediate plans to withdraw support.

Bernanke said on Friday the economy is recovering at a moderate pace, and that there has been "welcome, if gradual" improvement in labor markets.