MarketView for April 16

Summary

The major equity indexes gained more than 1 percent on Tuesday, a day after their worst decline since November, as gold prices rebounded and earnings from Coca-Cola and Johnson & Johnson improved the outlook for first-quarter results. Inflation data, which reinforced expectations that the Federal Reserve will keep its stimulus plan in place, added to bullish sentiment. Of the 30 Dow components, only two ended the day lower.

The price of gold rose one percent after its record daily drop in dollar terms on Monday. The SPDR Gold Shares ETF, which fell 8.8 percent on record volume Monday, rose 1.1 percent to $132.80. The S&P 500 materials index climbed 1.9 percent, leading the S&P 500 index higher.

The market's advance followed the S&P 500's drop of more than 2 percent drop on Monday, giving the index its worst one-day percentage loss since November 7. The S&P 500 is up 10.4 percent since the start of the year after enjoying a strong first-quarter run, partly as a result of the Fed's continued stimulus efforts.

Coca-Cola rose 5.7 percent to $42.37, after rising intraday to $42.48, its highest since 1998,and ranked as the Dow's biggest percentage gainer. The stock's surge followed Coca-Cola's earnings on Tuesday, when the world's largest soft drinker maker reported a higher-than-expected profit and a deal to unload some distribution territory to five independent U.S. bottlers.

Johnson & Johnson hit a record high of $83.54 after the company reported better-than-expected first-quarter earnings. J&J shares ended up 2.1 percent at $83.44.

S&P 500 earnings are now expected to have risen 1.8 percent in the first quarter, based on actual results from 42 companies and estimates for the rest, up from a recent estimate of 1.1 percent growth.

IBM rose 1.3 percent to end at $212, its session high two days before its quarterly earnings are to be released. IBM is set to release results on Thursday after the close.

Shares of the Walt Disney rose 3.2 percent to $60.75 and helped lift the Dow.

The Dow Jones Transportation Average, often an indicator of investors' perception of the economy, gained 2.2 percent. Shares of United Parcel Service were up one percent to $83.22, while the shares of FedEx gained 0.5 percent to end the day at $95.14.

After the bell, Yahoo lost 3.5 percent to $22.95 following the release of its results, while shares of Intel inched up just 0.1 percent to $21.94 after its earnings. During the regular session, Yahoo slid 0.8 percent to $23.79, while Intel rose 2.5 percent to $21.92.

International Paper, up 4.7 percent at $47.47, and Vulcan, up 6.8 percent at $48.69, were among the materials sector's top performers after analysts' bullish notes.

A separate report showed U.S. housing starts rose 7.0 percent last month to an annual rate of 1.04 million units, the highest in nearly five years.

Among other earnings, Goldman Sachs posted higher quarterly earnings but said revenue from client trading fell 10 percent, raising questions about the health of its largest money maker. Goldman's shares ended the day down 1.6 percent to $144.10.

In the retail sector, shares of Target fell  0.2 percent to $68.38 after the discount chain warned that earnings for the first quarter would miss its expectations.

J.C. Penney rose 5.6 percent to $15.19. On Monday, the company said it has borrowed $850 million from its revolving credit facility to help buy inventory.

Approximately 6.4 billion shares changed hands on the three major equity exchanges, as compared with the average daily closing volume of about 6.36 billion shares this year.

Economic Data Supports Fed Position

 Consumer prices fell in March for the first time in four months and factory output slipped, strengthening the argument for the Federal Reserve to maintain its monetary stimulus to speed up economic growth. Other data on Tuesday suggested the housing market recovery was losing momentum, even though housing starts breached the 1-million unit rate mark for the first time since June 2008.

The Labor Department said its Consumer Price Index edged down 0.2 percent last month as gasoline prices tumbled, unwinding some of February's 0.7 percent increase. Underscoring the benign inflation environment, consumer prices rose just 1.5 percent in the 12-months through March -- the smallest increase since July. Prices had increased 2.0 percent year-on-year in February.

Stripping out volatile energy and food costs, the so-called core CPI was up only 0.1 percent after gaining 0.2 percent in February. That lowered the 12-month increase to 1.9 percent in March from 2.0 percent in February.

A separate report from the Fed showed output at the nation's factories decreased 0.1 percent after advancing 0.9 percent in February. The decline was fairly broad-based, with output dropping for primary metals and electronics. Automobile assembly, however, increased. Despite the factory weakness, overall industrial production rose 0.4 percent last month due to a jump in utilities' output.

Economic data for January and February have suggested growth accelerated in the first quarter after activity almost stalled in the final three months of 2012. But in a replay of the prior two years, the economy appears to have hit a speed bump at the end of the quarter, with data ranging from employment to retail sales and manufacturing weakening significantly in March.

Much of the weakness is blamed on higher taxes and deep government spending cuts put in place in Washington. The lack of inflation and slowing economic growth bolster the case for the Fed to remain on its very easy monetary policy path, despite divisions among policymakers over the wisdom continued asset purchases.

Minutes of the Fed's March 19-20 meeting published last week suggested the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds meant to keep interest rates low and spur faster job growth.

On Tuesday, New York Federal Reserve Bank President William Dudley cautioned against pulling back too soon, pointing to the sharp moderation in the pace of job growth in March.

"I'd note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job creation rate and this, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious," he told the Staten Island Chamber of Commerce.

A third report from the Commerce Department showed housing starts rose 7.0 percent last month to a 1.04 million-unit annual rate, the highest in nearly five years. However, the increase was driven by the volatile multi-family sector, while groundbreaking for single-family units fell. In addition, permits for future construction tumbled 3.9 percent -- reversing February's gain.

That suggested a slowdown in housing activity, coming on the heels of a report on Monday that showed a third straight monthly decline in homebuilders' confidence in April.