MarketView for April 25

Summary

 

The financial markets rallied on Wednesday, with a sharp rise in the price of Apple's shares giving the Nasdaq its largest gain of the year, while the Fed chairman Ben Bernanke reassured the markets that the central bank would do more if necessary to lift the economy.

 

Apple fueled optimism that the current earnings season would be much stronger than expected, generating gains across all market sectors. The iPad and iPhone maker's results, released after Tuesday's closing bell, showed that its quarterly profits nearly doubled, while its revenue easily topped expectations. The rally in Apple's stock especially benefited the S&P 500 tech sector.

 

Shares of Apple, which has the world's biggest market capitalization, jumped 8.9 percent to end at $610. The stock scored its best daily gain in a little more than three years and Wednesday's rally added $46.3 billion to Apple's market cap. Earlier, Apple surged 10.3 percent to a session high at $618. At Wednesday's close, Apple accounted for 5.05 points -or 27 percent - of the S&P 500's gain for the day of 18.72 points.

 

Apple's results boosted S&P 500 companies' earnings growth to an estimated 6.9 percent for the first quarter, up from an estimate of 4.6 percent before Apple, according to Thomson Reuters data. Apple's shares had sold off recently, partly on fears that its earnings could disappoint.

 

Federal Reserve Chairman Ben Bernanke spurred further gains when he said the Fed "would not hesitate" to launch another round of bond purchases to drive borrowing costs lower if it looked like the economy needed it. During the regular session, Bernanke's comments came as a welcome surprise to some stock investors.

 

The earnings season so far has been stronger than expected. With 200 of the S&P 500 companies reporting, three-fourths have topped estimates, according to Thomson Reuters data.

 

Giving the Dow its biggest lift was Boeing. It posted higher quarterly earnings, helped by increased commercial aircraft sales, as the Company raised its earnings forecast for the year. Boeing’s shares ended the day up 5.3 percent to close at $77.08.

 

On the down side, Caterpillar fell 4.6 percent to $103.44 after it said profit rose 29 percent. But the heavy equipment maker stoked Wall Street's fears about emerging markets by repeatedly citing slowdowns in economic growth in China and Brazil.

 

After the closing bell, shares of Akamai Technologies fell 7.1 percent to $36 following the release of its results.

 

The Dow Jones Transportation Average ended up 0.9 percent, despite the day's downbeat economic data. Investors often watch the transportation average as an indicator of the stock market's future direction.

 

March durable goods orders fell 4.2 percent in the biggest drop in three years. The report was the latest to show softness in U.S. economic data.

 

Approximately 6.8 billion shares changed hands on the three major equity exchanges, as compared to a daily average this year of 6.77 billion shares.

 

The Fed Is Prepared

 

Federal Reserve Chairman Ben Bernanke on Wednesday said U.S. monetary policy was "more or less in the right place" even though the central bank would not hesitate to launch another round of bond purchases if the economy were to weaken.

 

In a statement after a two-day meeting, the Fed's policy-setting panel reiterated its expectation that interest rates would not rise until late 2014 at the earliest, and it took no action on monetary policy.

 

The Fed also adjusted its economic forecasts to acknowledge an improving labor market and slightly higher inflation over the next few years. The revised forecast, along with a change of heart by the most dovish Fed officials on the timing of the first rate rise, suggested the central bank has grown somewhat less inclined to take more action to help the economic recovery.

 

"We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives," Bernanke said. "Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support."

 

However, he added: "For the time being, it appears that we are more or less in the right place.

 

Bernanke said the central bank could be spurred into doing more if the U.S. unemployment rate, which stood at 8.2 percent last month, failed to keep moving lower.

 

Fresh projections released by the Fed indicated that the most dovish officials no longer want to put off a rate increase until 2016. The Fed said seven officials believe it would be appropriate to raise borrowing costs in 2014, up from five officials in January, while only four wanted to wait longer, down from six.

 

Interest-rate futures showed traders now betting the first rate hike would come in March 2014, a month sooner than earlier thought.

 

A poll of 12 big Wall Street bond dealers put chances of a further easing of monetary policy at just 28 percent. Separately, economists at Nomura, which had previously expected the Fed to buy more bonds, said they now anticipated no action.

 

Prices for long-term U.S. government debt ended slightly lower as investors pulled back bets on further bond buying. Stocks closed higher as a near doubling of profits at Apple fueled optimism.

 

Richmond Fed President Jeffrey Lacker, who is known for his hawkish stance on inflation, dissented against the central bank's policy decision, saying he believed rates would need to rise sooner than late 2014. He has now dissented at all three of the policy meetings the Fed has held this year.

 

Domestic economic growth has been just firm enough to weaken the case for additional stimulus through Fed bond purchases. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but economists expect that it slowed to around a 2.5 percent pace in the first three months of this year.

 

The Commerce Department will provide its initial reading on first-quarter GDP on Friday.

 

The Fed described the economy as expanding moderately, just as it did last month, and noted that the unemployment rate had declined but remains elevated. In March it had said the jobless rate had declined "notably."

 

The central bank bumped up its growth forecast for 2012 but lowered it for the next two years. The forecast showed the central bank expects the jobless rate to fall faster than it did previously.

 

It also sees inflation higher over the next few years than it saw in January, with a notable rise in its forecasts for this year that takes into account a run-up in gasoline prices.

 

Still, the Fed does not expect inflation to breach its 2 percent target.

 

Policymakers nodded to "some signs of improvement" in the housing sector and, while repeating that they expect moderate economic growth in coming quarters, said the recovery should then "pick up gradually."

 

"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee expects to maintain a highly accommodative stance for monetary policy," the Fed said.

 

As officials gathered, the government reported that orders for long-lasting manufactured goods plunged 4.2 percent in March, the biggest drop since the economy was nose-diving in early 2009. The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.

 

Durable Goods Numbers Fall

 

According to a Commerce Department released Wednesday morning, demand for long-lasting manufactured goods fell by the most in three years in March and businesses cut back on spending plans, suggesting the economy slowed as the first quarter drew to a close. Order for durable goods fell4.2 percent, the largest decline since January 2009, data showed on Wednesday. Economists had expected a drop of just 1.7 percent. February orders were revised to show only a 1.9 percent increase instead of the previously reported 2.4 percent rise.

 

Data on durable goods, items ranging from toasters to aircraft that are meant to last three years or more, is notoriously volatile, and investors on Wall Street shrugged off the report. However, the data was the latest to show the factory sector losing a step in March and reinforced the Federal Reserve's view of moderate growth over the coming quarters.

 

However, there was a silver lining in the durable goods report. The data suggested that growth in business capital spending rose again in the first quarter and will support economic growth.

 

Although non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 0.8 percent in March, the figure for February was revised up to show a 2.8 percent gain, from the previously reported 1.7 percent increase.

 

In addition, shipments of non-defense, non-aircraft capital goods orders, which are part of the calculation of gross domestic product, rose 2.6 percent after increasing 1.4 percent in February.

 

The drop in orders for durable goods and an expected rise in inventories in the first quarter could set the economy up for a soft patch heading into the middle of the year.

 

Orders for durable goods last month were dragged down by a 12.5 percent plunge in bookings for transportation equipment - the most since November 2010 - as aircraft orders tumbled. Boeing received only 53 orders for aircraft, according to the plane maker's website, down from 237 in February.

 

Orders for motor vehicles barely rose last month. Excluding transportation, orders fell 1.1 percent after a 1.9 percent rise in February.