MarketView for February 15

Summary 

Share prices fell from their 2-1/2-year highs on Tuesday as energy and basic materials stocks led the slide in the S&P 500's worst day since January 28. Volume remained light with 7.1 billion shares changing hands on the combined equity exchanges, a number that was below last year's estimated daily average of 8.47 billion shares. Meanwhile, retail sales data cast doubts on a rebound in consumer spending, a vital part of the economic recovery, and import prices jumped, while a gauge of manufacturing in New York State climbed to its highest in eight months.

Shares of JDS Uniphase fell 10.2 percent to $25.05 after a brokerage house cut its rating on the stock to "market-perform" from "outperform."

The S&P energy sector carried most of the day's losses, falling 1.1 percent. Brent crude oil fell more than 1 percent as a result of the retail sales data and as China continued to struggle to keep inflation at bay. Among the energy stocks, Exxon Mobil fell 2.3 percent to close at $82.97, following a 2.5 percent gain on Monday.

The S&P 500 has nearly doubled from lows hit in March 2009, but waning volume suggests investors are having a harder time finding value.

The spread between daily winners and losers has been narrowing for months, suggesting more of the market's gains are coming from fewer stocks -- generally a sign of a weakening market. On Tuesday, declining stocks outnumbered advancing ones on the NYSE and the Nasdaq by a ratio of about 8 to 5.

The Verdict on Retail Sales is Still Undecided

Retail sales slowed in January, partly due to the wintery weather across much of the nation. Nonetheless, the trend remained supportive of acceleration in the economy. According to a Commerce Department report released Tuesday morning, total retail sales rose 0.3 percent for a seventh straight month of advances. Yet, this was still below the 0.5 percent increase posted in December. Bad weather also affected January's employment report and is making it hard to get a clear read of the economy. Nonetheless, activity is transitioning from a recovery to a self-sustaining phase.

It is unlikely that the pull back in sales last month is the start of a trend. An improving labor market and the $858 billion tax package enacted last year is likely to continue to spur consumers to keep spending, though not at the pace seen in the fourth quarter.

Consumer spending increased at a 4.4 percent rate in the fourth quarter, but modest downward revisions to November and December sales figures suggested this estimate could be trimmed when the government publishes its second GDP estimate next week.

Traders seized on the below-expectations retail sales data and a pullback in energy shares to give the markets a breather after recent hefty gains. At the same time, Treasury yields rose, while the dollar scaled an eight week high against the yen.

Sales, excluding autos, increased 0.3 percent last month for a 0.5 percent gain, after rising 0.3 percent in December. However, so-called core retail sales, which exclude autos, gasoline and building materials, increased 0.5 percent after slipping 0.1 percent in December. Core sales correspond most closely with the consumer spending component of the government's GDP report.

Last month's small rise in sales was a surprise as some major retail chains had reported receipts that exceeded expectations. There are concerns, however, that higher food and cotton apparel prices could hurt sales as they are adding pressure to budgets that are already being pinched at the gasoline pump.

Rising cost pressures were underscored by a report from the Labor Department showing import prices jumped 1.5 percent on strong commodity prices. The government is expected to report January’s CPI numbers.