MarketView for August 28

Summary   

Stock prices were somewhat lower on Friday with only the Nasdaq equity index managing to close out the day in positive territory. A weak consumer sentiment report offset positive news from bellwethers Dell and Intel. Nonetheless, all three major indexes still posted their second weekly advance, although the gains were relatively modest.

Consumer sentiment in August slid to a four-month low on worries about high unemployment and personal finances, a Reuters/University of Michigan survey showed, also curbing the market's appetite for risk.

Intel led the Nasdaq's major gainers and helped the index nudge back into positive territory in late afternoon trading. Intel's shares were up 4 percent to $20.25 after the chip maker raised its third-quarter revenue outlook on stronger-than-expected demand for its microprocessors and chipsets.

Dell closed up 1.8 percent to $15.93 and Marvell Technology gained 5 percent to $15.36, after both companies reported second-quarter earnings late Thursday that beat expectations.

For the week, the Dow was up 0.4 percent, while the S&P 500 gained 0.3 percent and the Nasdaq rose 0.4 percent.

The day’s losses were broad-based, with health-care stocks helping to lead the declines. Merck was down 1.7 percent at $32.32. Among the blue-chip Dow industrials, McDonald's ranked among the top losers, falling 1 percent to $56.07.

A bright spot was provided by Tiffany, which surged 11.3 percent to $37.57 after the luxury retailer reported strong second-quarter results and lifted its outlook.

Troubled financials continued to dominate trading. Shares of the two largest home funding companies, Fannie Mae and Freddie Mac, gained sharply, extending a trend seen earlier this week. Freddie Mac was up 7.1 percent at $2.40 and Fannie Mae gained 6.3 percent to $2.04. American International Group rose 5 percent to $50.23, up 53 percent for the week. Citigroup chalked up a gain of 3.6 percent to $5.23.

In other data released on Friday, a report from the Commerce Department showed consumer spending edged up 0.2 percent in July, largely driven by the government's "cash-for-clunkers" program, while personal incomes were flat in June.

Consumer Spending Rises

According to a report released on Friday by the Commerce Department, consumer spending increased by 0.2 percent in July, largely the result of the government's "cash-for-clunkers" program that fueled demand for autos. Spending had risen by 0.6 percent in June. Consumer spending, which accounts for about two-thirds of U.S. economic activity, fell at a 1 percent annual rate in the second quarter after a 0.6 percent gain in the prior period.

Still, the gain in July spending and upward revisions to June's figures raised hopes consumption would recover in the third quarter as an improvement in the economic outlook and slowdown in the pace of layoffs boost consumer sentiment and encourage households to spend more, they said.

However, the income number was another story, coming in flat after a steep 1.1 percent drop in June, underscoring the pressure on households from falling housing prices and rising unemployment. Personal income was flat in July. Real disposable income edged down 0.1 percent in July.

However, private wage and salary disbursements increased $6.7 billion in July, the first gain since last August, after a $24.5 billion drop in June. The increase probably reflected the slowdown in layoffs during the month.

With disposable income declining, savings slipped to an annual rate of $458.5 billion. That took the saving rate down to 4.2 percent from 4.5 percent in June, the department said. Subdued demand is keeping a lid on inflation pressures, the report showed.

While data ranging from home sales to factory activity have been fairly upbeat, indications are that consumers will play a limited role in the recovery, widely believed to be under way. The economy's recovery was seen driven by the rebuilding of inventories after a record aggressive drawdown by companies and increased government spending.

A measure of inflation closely watched by the Federal Reserve, the year-on-year personal consumption expenditures price index excluding food and energy, rose 1.4 percent -- the lowest since October 2003 -- after a 1.5 percent rise in June.

Crude Rises on Optimism

The price of crude oil rose slightly on Friday. The rise was primarily the result of continuing optimism that the recession is ending with the result that there will be a rebound in the demand for energy. Domestic sweet crude futures for October delivery settled up 25 cents per barrel at $72.74. London Brent settled up 28 cents per barrel at $72.79.

The strength extends Thursday's gain of $1.06 on the back of better-than-expected GDP and jobs data in the United States, the world's largest energy consumer. Adding to the optimistic sentiment Friday was data showing consumer spending up in July, while the U.K. economy shrank slightly less than expected in the second quarter.

Crude oil prices have moved dramatically this week between $70 and $75 a barrel without clear long-term direction.