MarketView for July 27

Summary

The major equity indexes rose sharply on Friday, driving the S&P 500 to its highest close since May 3 as hope emerged once again that the Federal Reserve and the European Central Bank would provide some degree of additional stimulus. Taken together, the S&P 500's two-day move were its largest since December, driven by optimism that central banks will ride to the rescue with more aid for the world economy. The S&P 500 rose 3.6 percent in those two days, and the moves come before key meetings of both the Fed and the ECB next week. Meanwhile, the Dow ended above 13,000 for the first time since May 7. European Central Bank President Mario Draghi will meet with Bundesbank President Jens Weidmann to discuss several measures, including bond purchases, to help the euro zone.

Meanwhile, you could make the case that our economic picture remains somewhat dismal as earnings continue to disappoint investors. Shares of Facebook hit an all-time low on Friday after posting its first-ever results, while S&P 500 guidance on the current quarter is the most negative it's been since 2001, Thomson Reuters data showed. Nonetheless, share prices posted strong gains for the week, with the S&P 500 chalking up its third straight week of increases. For the week, the Dow was up 2 percent, the S&P 500 was up 1.7 percent and the Nasdaq was up 1.1 percent.

While 67 percent of the 290 S&P 500 companies that have reported second-quarter results so far have beaten earnings expectations, just 40 percent have beaten revenue estimates, the lowest amount since the first quarter of 2009, Thomson Reuters data shows.

Helping the argument for additional stimulus by the Fed, the latest data indicated that gross domestic product growth slowed to a 1.5 percent annual rate in the second quarter as consumers spent at their most sluggish pace in a year.

Sentiment also gained ground on Friday after the French daily Le Monde reported that euro-zone governments and the ECB are preparing to take action to bring down borrowing costs for Spain and Italy.

Friday's session saw financial stocks becoming the day's best performers. In contrast to the broad market's buoyant performance, Facebook fell to an all-time low of $22.28 a day after the social media company reported a drastic slowdown in revenue growth. Facebook had also failed to offer financial forecasts to quell fears about its ability to boost advertising growth. On Friday, the stock ended the day at $23.71, down 11.7 percent.

Merck was among companies adding the most momentum to the Dow after the Company reported better-than-expected quarterly earnings, with strong sales growth of its vaccines and treatments for diabetes and HIV. Merck’s shares ended the day up 4 percent to close at $45.08.

Amazon rose 7.9 percent to end the day at $237.32 after reporting improved profit margins on Thursday after the bell.

Approximately 7.54 billion shares changed hands on the three major equity exchanges , as compared to the year-to-date daily average of 6.75 billion shares.

Second Quarter Mediocre at Best

Economic growth slowed in the second quarter as consumers spent at their slowest pace in a year, increasing pressure on the Federal Reserve to do more to bolster the recovery. More specifically, gross domestic product expanded at a 1.5 percent annual rate between April and June, the weakest pace of growth since the third quarter of 2011, the Commerce Department said on Friday. At the same time, first-quarter growth was revised up by a tenth of a percent to a 2.0 percent pace.

Details of the report were weak, with foreign trade being a drag and stocks of unsold goods rising. That, together with signs that activity slowed further early in the third quarter strengthens the argument for the Fed to offer the economy additional stimulus at its September meeting.

In a nod to the darkening economic outlook, the White House on Friday cut its growth estimate for this year to 2.3 percent from 2.7 percent back in February. The growth forecast for 2013 was pared to 2.7 percent from 3.0 percent.

The economy's expansion following the 2007-09 recession is the slowest since the 1980-81 period and the recession itself was the deepest in the post-war period. Yet, no major policy announcement is expected at the Fed's two-day meeting next week, but many economists now say the central bank could launch a third round of bond purchases, also known as quantitative easing, when policymakers gather on September 12-13.

However, there is a chance the Fed could push further into the future its conditional pledge to keep rates near zero through late 2014. The Fed has already injected $2.3 trillion into the economy through asset purchases and slashed overnight interest rates to near zero.

The economy has been hit by worries of deep government spending cuts and higher taxes scheduled to kick in at the start of 2013, as well as troubles from the debt crisis in Europe. The largest factor weighing on the recovery is fear that politicians in Washington will be unable to avoid the so-called fiscal cliff at the turn of the year, economists said. Third-quarter growth is forecast at a rate between 1 and 1.5 percent.

Expectations of further monetary stimulus fueled a rally on Wall Street, with the Dow Jones industrial average closing above 13,000 for the first time since May 7.

The S&P 500 index reached its highest level in nearly three months. Treasury debt prices fell as the GDP report was in line with economists' expectations. The dollar rose against the yen.

Much of the slowdown in growth in the second quarter was caused by a softening in consumer spending as Americans eased off on automobile purchases due to tepid job and income growth.

Consumer spending, which makes up about 70 percent of U.S. economic activity, increased at a 1.5 percent rate, a step down from the 2.4 percent pace logged in the previous three months.

Consumer spending was the weakest in a year.

Ford this week said that because of cooling demand it now expected industry wide  sales to be at the lower end of its forecast of 14.5 million to 15 million vehicles, including medium- and heavy-trucks.

The outlook for spending is not promising. Worries over jobs and income pushed consumer sentiment to its lowest level in a year in July, a second report showed. The Thomson Reuters/University of Michigan's consumer sentiment index fell to 72.3 this month from 73.2 in June.

Employment growth averaged 75,000 jobs a month in the second quarter, compared to an average monthly increase of 226,000 in the first three months of the year. The unemployment rate was 8.2 percent in June. The economy needs to grow at a rate of between 2 percent and 2.5 percent just to keep the unemployment rate stable.

Wary of the economic outlook, Americans pocketed money from falling gasoline prices in the second quarter, pushing the saving rate up its the highest level in a year.

While business inventories contributed nearly a third of a percentage point to GDP growth, slowing domestic demand means businesses could find themselves with unwanted stock. That would be a drag on third-quarter growth.

Excluding inventories, GDP rose at a 1.2 percent rate, the weakest pace since the first quarter of 2011. In the first quarter, the comparable figure was 2.4 percent.

Export growth pushed higher, despite slowing demand in Europe and China, but it was offset by a strong rise in imports. Trade subtracted almost a third of a percentage point from GDP growth.

Government spending contracted for an eighth straight quarter, but the pace of decline slowed. Defense spending fell marginally after two quarters of hefty declines.

Weak demand muzzled inflation pressures during the quarter. A price index for personal spending rose at a 0.7 percent rate, the lowest pace since the second quarter of 2010, after rising 2.5 percent in the first quarter.

A core measure that strips out food and energy costs advanced at a 1.8 percent rate, moderating from 2.2 percent in the prior quarter.