MarketView for July 18

Summary

Both the Dow Jones Industrial Average and the S&P 500 indexes closed at record highs on Thursday after Morgan Stanley and others reported better-than-expected earnings. At the same time, Federal Reserve Chairman Ben Bernanke's comments further reassured markets. At Thursday's close, the benchmark S&P 500 was up 18.5 percent for the year. Both the Dow and the S&P 500 also hit all-time intraday highs shortly after the opening bell. The Dow climbed as high as 15,589.40, while the S&P 500 set a record session high of 1,693.12.

So far, the S&P 500 companies' second-quarter earnings to have grown 3.5 percent from a year earlier, with revenue up 1.1 percent, according to Thomson Reuters’ data. And 70.4 percent of all companies that have reported results have surpassed analysts' earnings expectations, while 49.4 percent have exceeded revenue expectations.

Shares of Morgan Stanley were up 4.4 percent to $27.70, its highest close since April 2011, after the bank posted a 42 percent increase in quarterly profit as stock trading revenue increased sharply. Of the 21 financial companies that have reported quarterly earnings so far, 76 percent have exceeded Street estimates.

UnitedHealth rallied, buoying the Dow and other health insurers' stocks. UnitedHealth gained 6.5 percent to $70.55 after the company's results beat expectations.

Bernanke, speaking before the Senate Banking Committee, reiterated comments he made on Wednesday to the House Financial Services Committee. He stressed that the timeline for winding down the Fed's stimulus program was not set in stone.

Thursday's session marked the first time that both the Dow and the S&P 500 set intraday record highs since May 22. On that same day, the rally was interrupted when Bernanke hinted that the Fed planned to begin pulling back its stimulus. His comments triggered a sharp selloff, leading to a drop of nearly 6 percent in the S&P 500 over the next month.

Street estimates for corporate earnings have been lowered so much that investors believe the low targets should be easily exceeded. Instead, investors probably will hone in on revenue figures and outlooks.

IBM raised its full-year outlook and reported earnings that beat estimates, though the company's revenue missed forecasts. The company’s shares rose 1.8 percent to $197.99. IBM gave one of the biggest lifts to the S&P 500 and helped offset the impact of slides in Intel and eBay.

Intel, which limited the Nasdaq's gain, fell 3.8 percent to $23.24, after the world's largest chipmaker cut its full-year revenue forecast. Shares of eBay fell 6.7 percent to $53.52 after the e-commerce company said full-year results would be at the low end of its forecast range.

There were more disappointing tech results after the bell. Shares of Google fell 4.9 percent to $865 following the release of its earnings, which reflected a drop in its online ad prices. Google ended the regular session down 0.9 percent at $910.68.

Microsoft also fell after the close. The stock was down 4.5 percent at $33.85 after it reported lower-than-expected quarterly earnings. Slow personal computer sales hurt its Windows business, Microsoft said.

Shares of Advanced Micro Devices were down 3.5 percent to $4.48 in extended-hours trading following the Company's results.

A meeting of Dell shareholders to vote on founder Michael Dell's $24.4 billion offer to take the company private was adjourned to next week. Dell's stock rose 1.9 percent to $13.12.

The day's economic data signaled strength in the economy. New claims for U.S. jobless benefits fell by 24,000 last week to a seasonally adjusted 334,000, the lowest since early May. An index of factory activity in the Mid-Atlantic region increased in early July to 19.8, its highest level in more than two years, according to the Federal Reserve Bank of Philadelphia.

After the close, the city of Detroit filed for bankruptcy, the largest-ever municipal bankruptcy in the Country’s history.

Approximately 6.1 billion shares changed hands on the three major equity exchanges , a number that was below the average daily closing volume of about 6.4 billion shares this year.

Economic Data Offers Hope

New claims for jobless benefits fell last week and factory activity picked up in the Mid-Atlantic region in early July, signs of a stronger economy that could help push the Federal Reserve to ease its monetary stimulus. Thursday's data adds to the view that economic growth could pick up after a dismal first half of the year in which consumers were smacked by tax hikes and deep cuts in the federal budget.

Fed Chairman Ben Bernanke expects the economy will gather enough steam by the end of the year for the Fed to begin scaling back a bond-purchase program it has used to push down borrowing costs, and Thursday's data appeared to support his case.

The Philadelphia Federal Reserve Bank said factory activity in eastern Pennsylvania, southern New Jersey and Delaware rose to its highest level in more than two years as employment and shipments picked up.

The bank's index of business activity index rose to 19.8 from 12.5 in June, far exceeding economists' expectations. Any reading above zero indicates expansion in the region's manufacturing. The report points to early signs that manufacturing is expanding despite weakness in the global economy. The New York Fed said on Monday factory activity accelerated in New York State in July.

In a separate report, the Labor Department said initial claims for state unemployment benefits dropped by 24,000 to a seasonally adjusted 334,000. It was the lowest reading since May and a steeper fall than the Street had expected.

The drop in new claims was the latest data to point to resilience in the labor market. While Washington's austerity measures appear to have dragged heavily on growth in the first and second quarters, the pace of hiring has barely slowed, with employers adding 195,000 jobs in June.

At the same time, the labor market data from last week was clouded by seasonal factors. Readings for claims can be volatile in July because many auto factories close to retool, and it is difficult for the government to adjust the data for seasonal swings because shutdown schedules vary from year to year.

Still, a four-week average of new claims, which smoothes  out volatility, fell 5,250 from a week earlier.

The dollar extended a rally against the yen and yields rose for long-term U.S. government debt, signs that investors were betting on tighter monetary policy in the future. U.S. stocks rose to record highs after investment bank Morgan Stanley posted stronger-than-expected profits.

The jobless claims data covered the same week in which the Labor Department looks at employers' payrolls to estimate how many jobs the economy added during the full month. Compared to the survey week for last month, the four-week average for claims was 0.7 percent lower last week.

A third report showed a gauge of future U.S. economic activity held at a near five-year high, with the Conference Board's Leading Economic Index flat at 95.3 last month.

Bernanke, who appeared before lawmakers for the second straight day on Thursday, repeated his message that the Fed would only begin withdrawing its support if the economy improves as much as policymakers expect.

In a potentially negative sign for the labor market, the Labor Department said the number of people still receiving benefits under regular state programs after an initial week of aid rose 91,000 to 3.1 million in the week ended July 6.

However, increase could also be related to difficulties in adjusting the data for seasonal swings around America's July 4 holiday.