MarketView for April 30

Summary

 

The S&P 500 posted its first monthly decline since November on Monday, as share prices slipped on signs the economy may be slowing. At the same time the announcement by Spain that its latest economic numbers confirm that it is once again in a recession, highlighted once again the risks in the euro zone.

 

Despite Monday's decline, the picture was not overwhelmingly negative. The S&P closed out April with a decline of 0.8 percent, after four straight days of gains last week helped the index pare much steeper losses for the month. Defensive sectors were the best performers in April.

 

Nonetheless, recent economic data suggests the economy may slow in the summer months and has caused the market to stall just shy of the four-year highs reached earlier in the month. A much sharper-than-expected decline in Midwestern business activity in April reported on Monday by an industry group was the latest evidence of a slowdown.

 

Trading volume was among the lightest of the year as 6.1 billion shares changed hands on the three major equity exchanges on Monday, as compared with a daily average this year of around 6.8 billion shares. The CBOE volatility index, or VIX, was up 5.1 percent, after hitting its highest level in more than a week.

 

Spain on Monday reported its economy contracted in the first quarter, dragging the country into recession as deep government spending cuts to reduce a massive deficit and troubles in the banking sector likely delayed any return to growth. Though expected, the news highlighted the serious headwinds the world economy faces.

 

Banks were among the top decliners on Wall Street after Standard & Poor's cut the credit ratings of 11 Spanish banks on Monday, following its downgrade of Spain last week. Bank of America fell 1.7 percent to $8.11. Shares of Santander, a large Spanish bank, fell 2.2 percent to $6.33 and are down 16 percent this year.

 

The S&P 500's 0.8 percent decline for April was a comeback from earlier in the month when worries over Europe and the U.S. economy sent it down more than 4 percent for the month.

 

Many investors are still worried about the potential for a pullback heading into the seasonally weak period for stocks that starts in May, especially if it is accompanied by a slowing economy and more problems in Europe.

 

"In equities, we stepped back to neutral several weeks ago," Goldman Sachs wrote in a research note. "Our general view is that the U.S. seems to be slowing - though how much and for how long is an open question - while equity market domestic growth views remain elevated."

 

Shares of Monster Beverage were up as much as 28 percent on Monday after The Wall Street Journal reported Coca-Cola is in talks to buy the energy drink maker, but the shares closed 0.8 percent lower after a denial from Coca-Cola.

 

In earnings news, Humana fell 8.1 percent to close at $80.68 after the company, one of the largest providers of Medicare insurance for the elderly posted a 21 percent earnings decline.

 

Exchange operator NYSE Euronext reported its quarterly earnings number fell by almost one-third due to a difficult trading environment and costs from its failed merger with Deutsche Boerse. Its shares ended the day down 4.9 percent to close at $25.75.

 

According to Thomson Reuters data through Monday morning, of the 297 S&P 500 companies that have reported quarterly numbers so far, 72 percent exceeded estimates. A strong earnings season helped lift the benchmark S&P index to its best week since mid-March last week.

 

Apple’s shares gave back some of their post-earnings gains, falling 3.2 percent to $583.98. Last week the shares rose 9 percent after the company exceeded by a large margin Wall Street earnings estimates.

 

On the positive side of Monday's earnings, shares of Sunoco rose 20.5 percent to $49.29 after pipeline operator Energy Transfer Partners LP  said it would buy the company for $5.35 billion in stock and cash.

 

The shares of Barnes & Noble rose 52 percent to $20.75 after Microsoft agreed to invest $300 million in the bookseller's digital and college operations. The deal values the Nook and textbook businesses at $1.7 billion.

 

Household Income Rises

 

A report by the Commerce Department released Monday morning, indicated that household income rose in March by the most in three months but consumers saved part of the extra cash and only modestly increased spending, suggesting economic growth ended the first quarter on a soft note.

 

According to the Department, consumer income rose 0.4 percent last month, while after-tax income climbed 0.2 percent in March when accounting for higher prices. Consumer spending rose 0.3 percent. When taking into account inflation, which has been fed in recent months by higher gasoline prices, spending was up 0.1 percent.

 

Stronger consumer spending over the entire quarter cushioned the blow, but Monday's data suggested consumers ended the quarter spending less freely. With consumption rising less quickly than income, the saving rate edged higher to 3.8 percent.

 

A price index for personal spending rose 0.2 percent in March. In the 12 months through March, the PCE index was up 2.1 percent, the lowest in a year but still just above the Fed's target of 2 percent. The personal consumption Expenditure or PCE index is the average increase in prices for all domestic personal consumption.

 

It is indexed to a base of 100 in 2005. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the Gross Domestic Product in the BEA's National Income and Product Accounts, personal consumption expenditures.

 

Another measure of prices suggested some build-up of inflationary pressure, however. The core PCE index, which strips out volatile food and energy prices and is often read as a measure of inflation trends, rose 2.0 percent in March from a year earlier, the biggest year-on-year rise since November 2008.

 

Small Business Hiring Slows

 

Small business hiring slowed considerably in the April and employees saw a reduction in their hours, an independent survey showed on Monday, adding to signs of weakening in labor market conditions.

 

Businesses added 40,000 new jobs, a step back from the 75,000 positions created in March, according to Intuit, a payrolls processing firm. The average workweek for small business employees dipped 0.14 percent.

 

The pull back in hiring by small businesses is the latest indication that job growth is losing some momentum. Nonfarm employment increased 120,000 in March, the least amount in five months, with the jobless rate dropping to 8.2 percent -- largely as some unemployed people gave up the search for work.

 

The weak payrolls number last month was largely seen as payback after an abnormally warm winter. Payroll growth had averaged 246,000 a month between December and February.

 

The government's closely monitored employment report due on Friday is expected to show that payrolls increased 170,000 in April, according to a Reuters survey.

 

But with first-time applications for state unemployment benefits not backing away from the lofty levels scaled in recent weeks, this forecast could prove somewhat too optimistic.

 

The Intuit survey is based on responses from about 72,000 small businesses with fewer than 20 employees that use the Intuit Online Payroll system. It covered the period from March 24 to April 23.

 

The survey showed wages for small business employees edged up 0.1 percent or $3 to $2,680. However, that is equivalent to an annual salary of $33,200, meaning that many of the small business employees are working part-time.

 

Home Ownership Drops

 

The Commerce Department reported on Monday that the proportion of privately owned homes fell to a 15-year low in the first quarter, suggesting that falling house prices are discouraging Americans from owning homes. The homeownership rate slipped to 65.4 percent, the lowest level since the first quarter of 1997, the Department reported. The rate was at 66.0 percent in the fourth quarter.

 

Midwest Business Activity Falls

 

According to the Institute for Supply Management, business activity in the Midwest slowed more than expected in April, falling to its lowest since November 2009 as new orders slipped, a report showed on Monday.

 

The ISM-Chicago's business barometer fell to 56.2. The reading was 62.2 in March. A reading above 50 indicates expansion in the regional economy. The employment component of the index rose to 58.7 from 56.3. But new orders dropped to 57.4 from 63.3 in March, dragging down the overall growth number.