MarketView for April 26

Summary

It was a mixed day on Wall Street on Friday on light volume. Nonetheless, the markets had a strong week overall despite a maze of earnings to decipher combined with weak economic figures.

Shares of Amazon posted their largest daily drop in 15 months after the company reported results after the markets closed on Thursday. Amazon ended the day down 7.2 percent to close at $254.81 after the company reported that revenue growth declined during the first quarter as the company struggled overseas, but margins increased on lower shipping expenses.

The company was Friday's largest drag on the S&P 500 and Nasdaq indexes.

Gains in shares of Chevron Corp (CVX.N) buoyed the blue-chip Dow industrials. Chevron rose 1.3 percent to $120.04 after it posted earnings that exceeded expectations, even as lower oil prices bit into the profits of the country’s second largest oil company.

The market fell early after a negative surprise from the gross domestic product report, but the decline attracted bargain-hunting investors late in the session. Major indexes posted solid gains for the week.

J.C. Penney was the largest percentage gainer with the S&P 500, up 11.5 percent to $17 after CNBC reported Goldman Sachs lined up a $1.75 billion loan for the retailer. The news added to previous gains a day after investor George Soros reported a 7.9 percent passive stake in the company.

For the week, the Dow was up 1.1 percent, the S&P chalked up a 1.7 percent gain and the Nasdaq was up 2.3 percent.

Of the 271 companies in the S&P 500 that have reported earnings to date for the first quarter, 69 percent have beaten analyst expectations - above the 63 percent average since 1994 and slightly over the 67 percent beat rate over the past four quarters.

Eastman Chemical fell 5.1 percent to $68.97 a day after posting results, to lead the paraded downward of those companies that are within the S&P materials sector, which was, not unexpectedly, the worst performing sector within the S&P 500 index with a 1.4 percent decline.

The S&P traded Thursday within a point of its historic closing high set earlier this month and the 1,593 level is expected to be technical resistance in the near future.

The nation’s gross domestic product increased at a 2.5 percent rate in the first quarter, below estimates of 3 percent, raising concerns that the economy could struggle to cope with deep government spending cuts and higher taxes that kicked in earlier this year.

D.R. Horton, the nation’s largest. homebuilder reported higher earnings. As a result, Horton’s shares closed at their highest in six years on an 8.7 percent increase to $26.60.

Approximately 5.7 billion shares changed hands on the on the three major equity exchanges on Friday, a number that was below the daily average so far this year of about 6.4 billion shares.

GDP Disappoints

The economy grew somewhat in the first quarter, but not as much as expected, raising concerns that could be some severe aftershocks from the deep government spending cuts and higher taxes.

According to Friday’s report by the Commerce Department, gross domestic product (GDP) expanded at a 2.5 percent annual rate. The rate comes on the heels of stalled growth in the fourth quarter. The Street had been hoping for a 3.0 percent rate of growth.

Growth rebounded in the early part of 2013 but data ranging from employment to retail sales and manufacturing weakened substantially in March. It appears the factory sector slowed further in April and many forecasters expect the economy's softness to persist into the third quarter before a convincing revival emerges, given belt-tightening in Washington.

A 2 percent payroll tax cut expired at the start of the year and $85 billion in mandatory spending cuts, known as The Sequester, started to take hold at the beginning of March. As a result, second-quarter growth is expected to come in around a 1 percent pace, with growth for the full year seen around a sluggish 2 percent, about the same as in the prior three years.

A large part of the increase in activity during the first quarter was due to the filling up of silos by farmers after a drought last summer decimated crop output. Removing inventories, the growth rate was a tepid 1.5 percent, a slowdown from a comparable 1.9 percent in the fourth quarter.

Still, most areas of the economy contributed to growth, with the exception of government, the trade sector and investment by businesses in offices and other commercial buildings. While consumer spending increased solidly, it came at the expense of saving, which does not bode well for the future.

A separate report showed worries about finances sapped consumer morale in April, offering another potentially troubling harbinger. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 76.4 last month from 78.6 in March.

The GDP report, which also showed a deceleration in inflation, provided ammunition for the Federal Reserve to maintain its monetary stimulus. The U.S. central bank, which meets next week, is widely expected to keep purchasing bonds at a pace of $85 billion a month.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose at a 3.2 percent pace - the fastest since the fourth quarter of 2010. The increase came despite the higher taxes and steeper gasoline prices. Households, however, had to cut back on saving as incomes dropped at a 5.3 percent rate, the steepest descent since late 2009.

The saving rate - the percentage of disposable income households are socking away - fell to 2.6 percent, the lowest since the fourth quarter of 2007, from 4.7 percent in the final three months of last year.

Despite the spike in gasoline prices, inflation pressures were benign. Inflation rose at a 0.9 percent rate, the smallest gain since the second quarter of 2012 and a sharp slowdown from the 1.6 percent pace logged in the fourth quarter. A core measure that strips out food and energy costs rose at a 1.2 percent rate.

The lack of inflation should come as welcome relief for American households, but it could cause some nervousness at the U.S. central bank, which aims to keep inflation close to 2 percent.

Business spending on equipment and software slowed sharply, and homebuilding also moderated, although it marked an eighth straight quarter of growth. Housing added to GDP last year for the first time since 2005.

While exports rebounded, they were outpaced by a surge in imports, resulting in a trade deficit that cut off half a percentage point from output.