MarketView for April 27

Summary

The equity markets advanced on Friday chalking up their best weekly gains in a month as stronger-than-expected earnings from Amazon.com and Expedia reinforced confidence in corporate performance. More succinctly, the Street managed a fourth day of gains as the strong earnings season outweighed a surprisingly weak reading on first-quarter economic growth. The S&P 500 posted its best weekly percentage gain since March and the Nasdaq its best gain since February.

Amazon was up 15.7 percent to $226.85 and contributed half of Nasdaq's gain for the day. Shares of Expedia rose 23.5 percent to close at $40.31, after hitting a new high of $43, trading on record volume.

Growth in S&P 500 earnings rose to 7.2 percent this week from 3.2 percent at the start of the month, according to Thomson Reuters data. About 73 percent of the companies that have reported so far have exceeded expectations.

With one more trading day left in the month, the S&P 500 is slightly lower so far in April but still up 11.6 percent for the year. The S&P is well above its 50-day moving average.

The earnings news overshadowed the day's economic news. The Commerce Department reported that the economy expanded at a 2.2 percent annual rate in the first quarter, a bit below economists' expectations for growth of 2.5 percent.

Among other companies reporting results, Ford surpassed expectations as its North American unit reported the best profit in at least 12 years. Nonetheless, the shares were down 2.3 percent to $11.60 after executives said Ford lost domestic market share in April, suggesting that second-quarter may also be lower.

Also on the downside, Procter & Gamble saw its share price fall 3.6 percent to $64.44 after the company cut its full-year profit view and posted lower quarterly earnings.

Starbucks was down 5.3 percent to $57.43 and was one of the largest percentage decliners on the Nasdaq 100 after the coffee chain operator reported results late on Thursday. The concern was weakness in European markets, even though its quarterly profit topped estimates.

Volume was approximately 6.2 billion shares on three major equity exchanges, a number that was below the daily average this year of 6.76 billion shares.

Consumer Sentiment Practically Unchanged

Consumer sentiment was little changed in April as Americans expected the economy to slowly improve, though they were less cheery about the state of their own finances, a survey released on Friday showed. According to the Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment inched up to 76.4 from 76.2 in March.

While recent developments in the overall economy were viewed as being somewhat less favorable, the outlook for the recovery still improved. The gauge of consumer expectations rose to 72.3 from 69.8, while the component measuring the five-year outlook rose to 92 from 89.

However, just one in four households expected their finances to improve during the year, and the survey's barometer of current economic conditions fell to 82.9 from 86.0. Twenty-eight percent of respondents said their finances improved in April, down from 34 percent in March and a slight improvement over 27 percent last year.

Consumers expected the recent rise in gasoline prices to moderate in coming months, but higher gasoline prices were still expected over the long-term. The survey's one-year inflation expectation fell sharply to 3.2 percent from 3.9 percent, while the survey's five-to-10-year inflation outlook eased to 2.9 percent from 3.0 percent.

GDP Growth Slows

According to a report released by the Commerce Department on Friday, economic growth slowed in the first quarter as businesses cut back on investment and restocked shelves at a slower pace. Yet the largest increase in consumer spending in more than a year cushioned the blow. Gross domestic product expanded at a 2.2 percent annual rate, thereby moderating somewhat from the fourth quarter's 3 percent rate.

Key among the surprises in the data was another large decline in defense spending. Still, growth was stronger than the 1.5 percent or less pace the consensus had anticipated early in the quarter.

While the growth pace remained too slow to offer comfort to President Barack Obama as he seeks a second term, it did not appear weak enough to alter the wait-and-see stance on monetary policy at the Federal Reserve.

Even with the deceleration in growth, the United States is performing better than most advanced nations, with some economies in Europe already back in recession. Government spending dropped for a sixth straight quarter as defense outlays fell and austerity at state and local governments showed few signs of easing.

A rise in demand for automobiles, which powered the largest pick up in consumer spending since the fourth quarter of 2010, helped offset the drag from government and business spending, which dropped for the first time since the recession ended.

The slump in business spending was likely to be temporary and related to the expiration of tax incentives for businesses, economists said. Corporations are sitting on a $2 trillion dollar cash pile.

In another heartening sign, home construction rose at its fastest pace since the second quarter of 2010, thanks to an unusually warm winter.

Although growth is not weak enough to spur the Fed into another round of bond buying, it still bolstered the central bank's view that interest rates should be kept near zero at least through late 2014. Fed Chairman Ben Bernanke said on Wednesday he was comforable with the current policy stance, although he held out the prospect of more bond buying if the economy deteriorated.

Meanwhile, consumers took up the slack for growth in the first quarter, some details of the report painted a somewhat weak picture for the second quarter. Consumer spending, which makes up about 70 percent of all domestic economic activity, increased at a 2.9 percent rate in the first quarter after rising 2.1 percent in the final three months of last year.

Automakers had reported that sales rose by the most in four years during the first quarter. Part of that reflected pent-up demand after last year's earthquake and tsunami in Japan left showrooms bereft of popular models. Motor vehicle production contributed 1.12 percentage points to first-quarter GDP growth, more than double the prior quarter, and spending on so-called durable goods, like autos rose at a 15.3 percent pace.

But a repeat performance in the second quarter is unlikely as auto sales ended the prior period on a soft note. And with wage growth anemic and the labor market showing early signs of fatigue after employment growth averaged 246,000 per month between December and February, the surge in consumer spending will probably fizzle.

Spending in the last quarter was funded from savings, with Americans stashing away cash at a slower 3.9 percent rate, compared to 4.5 percent in the fourth quarter. The amount of money left at the disposal of households after accounting for taxes and inflation increased at an only 0.4 percent pace after rising 1.7 percent in the prior quarter.

Inventories contributed just over half a percentage point to GDP growth compared to 1.81 percentage points in the fourth quarter. Still, that suggests that restocking could be a drag on second-quarter GDP growth. Excluding inventories, GDP rose at a 1.6 percent rate. In the fourth quarter, the comparable figure was just 1.1 percent.

Rising inflationary pressures were due in part to rising energy prices which also restrained GDP growth. A price index for personal spending rose at a 2.4 percent rate, accelerating from the fourth quarter's 1.2 percent pace. A core measure that strips out food and energy costs advanced at a 2.1 percent rate, also quickening from 1.3 percent in the prior quarter.