MarketView for August 16

Summary 

The S&P 500 closed at its highest level since early April on Thursday after comments from German Chancellor Angela Merkel appeared to support the European Central Bank's efforts to fight the region's debt crisis. Merkel said ECB chief Mario Draghi's vow to do all that is necessary to defend the euro is in line with what European leaders have been saying. Some traders took that as a sign Germany may be drawing nearer to backing purchases of sovereign bonds of troubled European nations such as Spain. The S&P also capped its longest string of gains since December 2010 as a continuing belief of more stimuli from the Fed and the European Central Bank in September to stimulate their respective economies continued to drive the markets upward.

The Nasdaq outperformed the market after Cisco shares rose 9.6 percent to close at $19.02 and Apple shares hit a new closing high of $636.34, while broad gains across most S&P 500 sectors offset a gloom from Wal-Mart. The day's gain was the first significant move since a 2 percent gain on Aug 3. Since then, the S&P 500 has been moving mostly higher, but in a slow motion. Cisco said it would hike its dividend 75 percent after surprisingly strong results late Wednesday. The dividend increase countered a gloomy outlook from Cisco on the debt crisis and recession in Europe.

Facebook fell to a new low of $19.69 as shares hit the market after the expiration of a lockup period, which had prevented sales by some insiders. The stock ended the day down 6.3 percent to close at $19.87.

However, the day’s gains were capped as Wal-Mart shed 3.1 percent to $72.15. The world's largest retailer posted a larger-than-expected rise in quarterly earnings but forecast a full-year number that could fall short of Street expectations.

Thomson Reuters data shows that of the 468 companies in the S&P 500 that have reported earnings through Thursday morning, 68 percent beat analysts' expectations, about the same rate as over the past four quarters.

Earnings were the large driver of share prices on Thursday; given that the day’s economic data was largely in line with forecasts. The number of Americans filing new claims for jobless benefits edged higher last week although the gauge of a longer trend fell close to a four-year low, indicating a slowly healing jobs market.

But housing starts fell unexpectedly by about 1.1 percent last month as the industry continues to have trouble finding its footing despite some recent signs of life in the sector.

Retailer Sears Holdings reported a quarterly loss in line with Wall Street estimates as lower expenses offset weak sales. Shares rose 6.5 percent to close at $60.29. Dollar Tree fell 1.8 percent to $49.11 after the discount retailer posted second-quarter earnings and forecast quarterly earnings and sales below analysts' expectations.

About 5.82 billion shares changed hands on the three major equity exchanges on Thursday, well below last year's daily average of 7.84 billion shares.

Slow but Steady

No one would deny that the economic recovery has been slow, nerve rackingly slow. Nonetheless, we are recovering, that there is no denying. Looking at the latest economic data released on Thursday, new claims for unemployment insurance fell close to a four-year low last week. According to a report released by the Labor Department Thursday morning prior to the opening bell, initial claims for state unemployment benefits inched higher by 2,000claims last week, reaching a seasonally adjusted total of 366,000 claims.

Despite the increase, claims data is now giving a clearer picture of modest improvement in the labor market after swinging wildly in July due to shifts in seasonal auto plant shutdowns. The four-week moving average for new claims, a measure of labor market trends, dropped 5,500 to 363,750. That was the lowest since March - and the second lowest since April 2008.

Other data on Thursday gave mixed signals about the strength of an incipient housing recovery, with groundbreaking on new homes falling slightly in July even as building permits rose. The Commerce Department reported that housing starts fell 1.1 percent last month to a seasonally adjusted annual rate of 746,000 units. The government also revised lower its estimates for starts in recent months.

The housing market, which fell into a deep rut six years ago, has been a relative bright spot in the economy this year. Home prices have shown signs of stabilizing and many economists think housing construction will give a small boost to the economy this year. There were also some positive signals in Thursday's report. New permits for building homes rose 6.8 percent in July to a 812,000 unit pace, the highest rate since August 2008.

Taken together, the data reinforced the view that economic growth might pick up in the second half of the year but would still be lackluster.

Weakness in a regional factory gauge also indicated that the economic recovery still faces an uphill climb. The Philadelphia Federal Reserve Bank reported on Thursday that its business activity index, which measures activity at factories in the mid-Atlantic region, was at minus 7.1 in August. Any reading below zero indicates a contraction in manufacturing in eastern Pennsylvania, southern New Jersey and Delaware.

Still, the Philadelphia Fed's report showed a smaller contraction in August than in July, which economists said took some of the edge off the bad news. Wall Street analysts were expecting a reading of minus 5.

While the festering crisis in Europe is a menace to do our domestic manufacturers, it is weighing heavily on the global economy. China said on Thursday the outlook for its exports has darkened. Also looming over the economy, the government is on track to raise taxes and cut spending next year - a prospect that is already hurting business sentiment.

Wal-Mart took note of a slowing in international markets as it forecast full-year earnings that could fall short of Wall Street expectations. It also said U.S. shoppers still appeared cautious. In addition, retailer Dollar Tree forecast quarterly sales below analysts' expectations.