MarketView for August 14

Summary

The financial markets ended the day about where they started on Tuesday during what some are calling a fatigued market after the S&P 500 chalked up gains in seven of the past eight sessions. I am not exactly sure how a market becomes fatigued, a somewhat nonsensical expression. If you mean a lack of enthusiasm for putting money to work in equities then that I could agree with.

Meanwhile, retail sales were the driving news of the day on Tuesday with July retail sales data coming in stronger than expected, although June figures were revised lower. Home Depot helped out as it raised its earnings guidance due to improvement in the housing market. Home, the world's largest home improvement chain, ended the day up 3.6 percent to close at $54.7. The company reported a higher-than-expected quarterly profit and kept a tight lid on costs to offset weakness in sales.

Retail sales rose 0.8 percent in July, the largest increase since February and better than the consensus of 0.3 percent rise. The previous month's numbers were revised to minus 0.7 percent from minus 0.5 percent.

Home Depot is seeing improvements in California and Florida, states that were hit hard by the housing downturn, according to Chief Executive Officer Frank Blake. His comments helped lift Dow Jones Industrial Average, but also housing stocks in general and the Dow Jones Home Construction index.

Nonetheless, the early in the day gains came off the major equity indexes by the afternoon. In the last five sessions, the S&P has not moved more than 0.22 percent in either direction, while volume has declined in what is normally a seasonally slow period. The 5.16 billion on the three major equity exchanges was well below last year's daily average of 7.84 billion shares.

The S&P 500 is close to a new four-year high, leaving investors looking for new catalysts to move the market higher. Yet, just 5.16 billion shares changed hands on the three major U.S. exchanges, a light day of trading.

The better retail sales data dovetailed with strong earnings reports from niche retailers like Estee Lauder. Estee Lauder rose 9.3 percent to $60.13 after the cosmetics and fragrance maker reported a higher-than-expected quarterly profit and forecast more sales growth this year. Reports from smaller retailers also supported the thesis of robust consumer spending that may help lift overall growth. However, Groupon fell 27 percent to $5.51 after the world's largest online provider of daily deals missed quarterly revenue expectations and gave a cautious profit outlook.

Retail Sales Up Sharply

According to a report released Tuesday morning by the Commerce Department, retail sales rose in July for the first time in four months as demand climbed for goods ranging from cars to electronics, a sign that consumers could drive faster economic growth in the third quarter. Sales were up 0.8 percent last month, the largest gain since February and well above expectations. The broad-based expansion in retail sales bolstered the view that the slowdown in economic growth during the second quarter will prove temporary.

A separate report showed producer prices increased in July at the fastest pace in five months even as energy prices fell. Consumer spending drives the economy. Hiring also accelerated in July despite an uptick in the jobless rate, and Tuesday's data added to uncertainty that the Federal Reserve will implement a third round of bond buying, or quantitative easing, to stimulate growth. Fed policymakers meet next on September 12-13.

Meanwhile, some policymakers at the Fed worry that further moves to lower borrowing costs could fuel inflation, though the central bank has said it was ready to do more to help the economy if needed.

While the Labor Department's index of producer prices, which measures prices received by farms, factories and refineries, climbed 0.3 percent last month on higher costs for consumer goods and food, the gain was muted by a drop in energy prices.

Still, core inflation at the wholesale level accelerated in July. The core measure has held at higher levels even as a sharp drop in energy prices over the past year has pulled overall producer prices lower.

Pointing to a strong increase in consumer spending in July, the so-called core measure of retail sales - which excludes autos, gasoline and building materials - rose 0.9 percent. That was the biggest gain since January.

Home Depot Inc, the world's largest home improvement chain, reported a quarterly profit that beat Wall Street views on Tuesday and raised its earnings outlook for the fiscal year.

Economic growth in the United States cooled to a 1.5 percent annual rate in the second quarter from a 2 percent pace in the first three months of the year, and economists are now banking on an acceleration.

In the retail report, the government said sales contracted more than previously thought in June, further darkening the view of the second quarter.

The Commerce Department said in another report that sales at all businesses slipped in June by the most since March 2009, which economists said should curb some enthusiasm over the jump in retail sales. Small business sentiment fell for a third straight month in July as owners worried about sales revenue, according to a survey by the National Federation of Independent Business.

Unfortunately, dark clouds continue to loom over the economic outlook. The euro zone's debt-ravaged economy shrank in the second quarter after flat-lining in the first, a report showed on Tuesday. Europe's travails have fueled economic uncertainty, and appear to be choking hiring in the United States. By undercutting global growth, the debt crisis in the euro zone has also pushed oil prices lower since March.