MarketView for April 3

Summary

Occasionally the Fed takes away the punch bowl and Tuesday was one of those days. The major equity indexes tumbled on Tuesday, with the S&P 500 retreating from four-year highs after the Fed indicated in the minutes of its last meeting that it was less inclined to provide more economic stimulus. The minutes from the Fed's March meeting noted "a couple" of committee members thought more stimuli might be needed if the economy loses momentum. The January meeting's minutes said a "few members" saw the need for more easing.

Supportive central bank policies have been a primary catalyst for the S&P 500's surge of 30 percent since October, even though improving economic conditions have also played a significant role in supporting the rally..

Sectors tied to growth were hurt the most, with energy and materials feeling the brunt of the pain. These sectors and the broader market extended losses after the release of the Fed's minutes, though they subsequently rebounded.

In the last week, economic figures have been somewhat less bullish for the financial markets, making the less supportive words from the Fed a significant disappointment. Nonetheless, auto sales posted their best quarter since 2008, another sign of increased demand by consumers. Auto sales increased more than 15 percent in March, ending the best quarter for domestic vehicle sales since 2008. However, General Motors did not participate, falling 4.6 percent to $25.54 as the increase in its sales trailed other automakers. In contrast, Ford rose 0.2 percent to closed at $12.64.

Among the financials, Morgan Stanley fell 2.2 percent to close at $19.37 after the Federal Reserve said it was taking an enforcement action against the company for the way one of its mortgage servicing units handled home loans.

Despite the day's declines, the Dow Jones industrial average was still up 8 percent for the year while the S&P 500 remained up 12.4 percent and the Nasdaq was up 19.5 percent so far this year.

A report from the Commerce Department reinforced the view the domestic economy was slowly improving as new orders for factory goods rebounded in February, although the increase was short of expectations. 

Volume on the major equity exchanges was light with about 6.75 billion shares changing hands on the three major equity exchanges, a number that was below last year's daily average of 7.84 billion shares.

Factory Orders Rise

New orders factory goods rebounded in February and firms increased orders for capital goods, suggesting manufacturing held on to some of the momentum characterizing the beginning of the year. According to a report by the Commerce Department, new orders for manufactured goods rose 1.3 percent.

On the negative side, slowing economic growth meant weaker restocking of companies' shelves, which in turn meant greater idle time factories. Also weighing on factories is the possibility that the expiration of some tax breaks on capital spending at the end of 2011 led businesses to bring forward investments.

Meanwhile, January's decline was revised downward to 1.1 percent from a previously reported fall of 1 percent. However, February's gain was nearly as high as the 1.4 percent rise in orders in December. Factory orders have been higher for three of the last four months.

New orders for durable goods, long lasting products from toasters to airplanes, rose 2.4 percent in February. That was higher than the government's initial estimate of a 2.2 percent increase. Orders for non-defense capital goods, excluding aircraft, is a closely watched category because it is taken as a sign of businesses' future spending plans, and it was 1.7 percent higher in February.

Shipments for this category climbed 1.4 percent. Business spending and manufacturing have been drivers of the recovery since the 2007-2009 recession.