MarketView for July 19

Summary

The major equity indexes were higher  on Thursday for a third straight day, with the S&P 500 at a 2-1/2 month high, as earnings from technology companies and expectations for more monetary stimulus outweighed weak economic data. So far in this earnings season a majority of companies have exceeded analysts' lowered expectations. The latest was IBM, which raised its full-year outlook, eBay's profit, which exceeded forecasts, and Qualcomm, which indicated that it expects a "strong December quarter."

IBM rose 3.8 percent to $195.34, making it the largest boost to the Dow industrials a day after it raised its full-year profit forecast. Qualcomm cut its revenue and earnings forecast for the current quarter, but investors took heart as it said sales would improve for a strong last quarter of 2012, sending its shares up 4.2 percent to $58.43. EBay shares jumped 8.6 percent to $43.95 after it posted stronger-than-expected quarterly revenue and earnings as more consumers shopped on its online marketplaces and used its PayPal payment service.

Despite the Nasdaq's out-performance compared with the other indexes, decliners in the index beat advancers by a ratio of more than 5 to 4. Investors like to see advancers beating decliners by a wide margin to confirm market strength. Meanwhile, the S&P is at its highest level since early May.

Weak manufacturing and employment data as well as falling revenue at investment bank Morgan Stanley, which sent its shares down more than 5 percent, capped gains in the wider market. Even so, expectations are that the Federal Reserve will soon step up stimulus efforts have helped the market shake off bad news. Fed Chairman Ben Bernanke said this week that the U.S. central bank would act if the outlook worsened.

Manufacturing in the mid-Atlantic region shrank for a third month and home resales were lower than forecast. That came shortly after a report showed more Americans applied for unemployment insurance in the latest week.

Morgan Stanley fell 5.3 percent to $13.25 as quarterly revenue declined due to a slowdown in trading and deal making volumes. The company will cut 1,000 employees by the end of this year.

Of the 19 percent of S&P 500 companies reporting earnings so far, 65 percent have beaten expectations, slightly better than average since 1994, according to Thomson Reuters data.

Outside the tech sector, Textron rallied 11.5 percent to $26.50 after the world's largest maker of corporate jets, which also makes EZ-Go golf carts and industrial components, handily beat Wall Street forecasts.

Walgreen soared 11.7 percent to $34.62 and Express Scripts added 1.9 percent to $58.76 after the companies said they struck a pharmacy network agreement that settles a long-running dispute. Walgreen competitor CVS Caremark fell 6.2 percent to $45.43.

Shares of Johnson Controls, the battery and auto interiors company, were down 7.9 percent to $26.07 after it posted a lower-than-expected quarterly profit and cut its outlook for the current period.

About 6.5 billion shares changed hands on the three major equity exchanges, as compared with the 50-day moving average of 6.7 billion shares.

Jobless Claims Rise

The number of Americans filing new claims for jobless aid rose sharply last week, heightening worries about the economy's health. The economy has been hit by fears of deep government spending cuts and higher taxes next year, and troubles from the debt crisis in Europe, culminating in slower job growth, weak consumer spending and manufacturing output.

A report from the Labor Department indicated that initial claims for state unemployment benefits rebounded by 34,000 claims to a seasonally adjusted 386,000 claims. A seasonal quirk caused claims to drop 24,000 in the prior week. The four-week moving average for new claims, a better measure of labor market trends, fell 1,500 to 375,500 - staying in the middle of the range it has held for much of 2012.

Initial claims data is volatile in July because of the timing of the annual auto plant shutdowns for retooling. Automakers have not embarked on wholesale plant shutdowns this year, throwing off the model the department uses to smooth the data for typical seasonal patterns. An official with the department said it was still experiencing volatility related to the auto layoffs that usually happen at this time of year.

Last week's claims data covers the period for the July payrolls count. The four-week average of new claims dropped 12,000 between the June and July survey periods, suggesting a marginal improvement in nonfarm payrolls. The labor market has suffered three months of sub-100,000 job growth as employers put the brakes on hiring.

The number of people still receiving benefits under regular state programs after an initial week of aid edged up 1,000 to 3.31 million in the week ended July 7.

A total of 5.75 million people were claiming unemployment benefits during the week ending June 30 under all programs, down 121,985 from the previous week.

Mid-Atlantic Factory Activity Falls

According to a report released on Thursday by the Philadelphia Federal Reserve Bank, factory activity in the mid-Atlantic region declined for a third month in July, though the pace was slightly less severe as new orders improved, a survey showed on Thursday. The Philadelphia Fed said its business activity index rose to minus 12.9 from minus 16.6 in June, though it missed economists' expectations for a stronger rebound to minus 8.0.

The forward-looking new orders index gained to minus 6.9 from minus 18.8. Any reading below zero indicates contraction in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware. It is seen as one of the first monthly indicators of the health of domestic manufacturing leading up to the national report by the Institute for Supply Management.

The employment components showed labor market conditions deteriorated as the gauge of the number of employees dropped to its lowest since September 2009 to minus 8.4 from 1.8. The average work week index contracted again, though it improved a touch to minus 17.3 from minus 19.1.

Survey respondents' view on the coming months held nearly steady with the gauge of business conditions for the next six months inching down to 19.3 from 19.5. Manufacturing has shown signs of wavering and the more comprehensive report from ISM showed the sector shrank last month. Data earlier in the week indicated that manufacturing in New York State increased durring July, although new orders contracted.

Leading Economic Index Drops

A gauge of future economic activity fell more than expected in June, pointing to slower economic growth. The Conference Board said on Thursday its Leading Economic Index fell 0.3 percent to 95.6 after rising 0.4 percent in May. Downbeat consumer expectations and weak manufacturing orders offset gains in construction and the average workweek.

"The LEI is pointing to no strengthening (in economic growth) over the next few months as the economy continues to sail through strong headwinds domestically and internationally," said Ken Goldstein an economist at the Conference Board.

The recovery has lost steam in recent months, with job growth slowing sharply and retail sales contracting. Factory activity, which has been one of the key pillars of the recovery, is also cooling.