MarketView for February 24

Summary

The S&P 500 rose on Friday to close at the highest level since before the collapse of Lehman Brothers in 2008, continuing a pattern of steady gains on signs of economic recovery. The broad index is up more than 8 percent this year, a rally built on a succession of modest gains, with only a handful of losses, none greater than a 0.7 percent drop.

Friday's positive data included a better-than-expected report on consumer confidence in February and new-home sales last month that exceeded expectations. However, what is somewhat bothersome is the lack of conviction that is evident from the recent low volumes. An average 6.4 billion shares changed hands daily on the three major equity exchanges this week, compared to a 7.81 billion daily average during February 2011. The good news is that volatility has also remained low, with the CBOE volatility index down about 11 percent so far this month.

For the week, the Dow Jones Industrial Average and the S&P 500 index were up about 0.3 percent and the Nasdaq added 0.4 percent to close at its highest point since mid-December 2000. The S&P 500's close was the highest since June 6, 2008, a few months before Lehman Brothers went bankrupt as the global credit crisis spiraled out of control. Nonetheless, the S&P 500 has struggled to climb above last year's intraday high near 1,370. The level has thrown up strong resistance in the past week, but a break above could set the market up for more gains.

Consumer confidence hit its highest point in a year this month despite a strong rise in gasoline prices, while new home sales fell in January but upward revisions to prior months' sales helped confirm the housing market is in a recovery.

According to Thomson Reuters data through Friday morning, of the 461 companies in the S&P 500 that have reported earnings, 63.3 percent topped expectations. That is below the 70 percent beat rate in the past four quarters but above the average of 62 percent since 1994.

Salesforce shares soared a day after the cloud computing applications provider posted earnings above expectations. The shares ended the day up 9 percent to $143.64.

Kenneth Cole Productions ended the day up 18.5 percent to $15.49 after the company's chairman offered to take it private.

Economy Continues Positive Outlook

New home sales were lower  in January but upward revisions to the prior months' data and a drop in the supply of properties on the market added to signs of a recovering housing industry. The Commerce Department reported on Friday that sales of new single-family homes fell 0.9 percent last month to a seasonally adjusted 321,000-unit annual rate.

However data for October, November and December were revised to show a much higher sales pace than previously reported, giving the report a stronger tone and putting January's figure above economists' expectations. Sales last month rose briskly in the Northeast and South but fell sharply in the Midwest and the West.

Despite the drop in new homes sales last month the supply of homes on the market fell to 5.6 months - the lowest since January 2006 - from 5.7 months in December.

A 6-month supply is generally considered an ideal level and the decline last month suggested the supply-demand situation in the new homes market was coming into better balance. The inventory of new homes on the market was the lowest on record.

But new home sales face stiff competition from previously owned homes, which represent a much larger share of the market. Many are selling at a huge discount because of foreclosures. The median price for a new home rose 0.3 percent last month to $217,100, the highest since October. It was the second straight month of gains. Compared to January last year, however, the median price was down 9.6 percent.

Nonetheless, the downward pressure on home prices is likely to ease, encouraged by recent declines in the supply of unsold previously owned homes, which fell to a near 6-year low of 6.1 months in January.

Data this week showed home re-sales rose to a 1-1/2-year high last month, and confidence among homebuilders in February neared a five-year high. Still, both sales and home construction remain far below their 2005 levels. 

At the same time, a separate report on Friday indicated that consumer confidence reached its highest point in a year this month despite a strong rise in gasoline prices. The Thomson Reuters/University of Michigan's final index of consumer sentiment in February edged up to 75.3, the highest since February last year, from 75.0 in January.

The rise in confidence came even as Americans faced higher prices for gasoline. Prices have jumped 8.8 percent since the start of this year, according to the Energy Information Agency, topping an average of $3.65 a gallon in the week through Monday. However, the pain at the pump is likely to be mitigated by falling natural gas prices and there is unlikely to be a repeat of 2011 when spiking gasoline prices almost tipped the economy back into recession.