MarketView for June 25

Summary  

Both the Nasdaq and S&P 500 indexes managed a bit of black ink by the closing bell on Friday as Wall Street came to the conclusion that the financial regulation bill will not be overly aversive to Wall Street’s bottom line. Add in some strong result from Oracle's and the Street decided that the world was not about to come to an end...at least not immediately. Nonetheless, the major indexes still ended the week lower after two straight weeks of gains and recorded their weakest performance in five weeks. For the week, the Dow Jones industrial average was down 2.9 percent, for the S&P 500 a loss of 3.6 percent, and for the Nasdaq a negative 3.7 percent.

Bank stocks moved higher after lawmakers agreed on rules that did not make dramatic changes to derivatives and proprietary trading, two highly profitable businesses in lawmakers' crosshairs. The bill must still be approved by both chambers of Congress before it can be signed into law. Nonetheless, JPMorgan Chase rose 3.7 percent to close at $39.44, while Bank of America gained 2.7 percent to close at $15.42.

Oracle closed up 1.7 percent to $22.60 a day after it posted a stronger-than-expected quarterly profit on solid sales of new software, while Wal-Mart fell 2.5 percent to $48.80. The week's high and low points covered a wider span than last week's. Closing below the previous week's low in an "outside week" is seen as a technical bearish signal.

In economic news, a survey showed that consumer sentiment rose more than expected while a government report showed first-quarter gross domestic product was slower than previously estimated.

Crude oil rose 3.2 percent to $78.91 per barrel on concerns that a tropical disturbance in the Caribbean may develop into a storm and threaten Gulf of Mexico production. At the same time, BP saw its share price fall to a 14-year low as it continued to struggle to contain its oil spill in the Gulf of Mexico and the storm threatened to disrupt the effort.

Some major companies announced disappointing earnings. For example, Research in Motion was the largest drag on the Nasdaq 100 as its share price fell 11 percent to $52.23 a day after reporting weaker-than-expected shipments and subscribers. KB Home was down 9 percent to $11.12 after the homebuilder reported a wider-than-expected quarterly loss.

Economic Growth Revised Downward

Economic growth was slower than previously reported in the first quarter, the result of lower consumer spending on services, and thereby raising concerns that the recovery is too lethargic to bring down unemployment.

According to the Commerce Department, gross domestic product expanded at a 2.7 percent annual rate instead of the 3 percent pace reported last month. Although the pace was below market expectations of 3 percent it still marked three straight quarters of expansion as the economy digs out of its worst downturn since the 1930s.

Growth in GDP, which measures total output within U.S. borders, has slowed from a 5.6 percent pace in the fourth quarter, when much of the lift came from government stimulus and a slowdown in the rate at which businesses were selling off inventories. The new softer reading for the January-March period reflected a downward revision to growth in consumer spending, which the department said rose at a 3 percent clip, not the 3.5 percent it had thought a month ago. Spending on services was lowered to a 1.4 percent growth pace from 2 percent previously.

Despite the downward revision, growth in consumer spending, which normally accounts for about 70 percent of U.S. economic activity, was still double the 1.6 percent rate in the fourth quarter and the largest advance in three years.

A downward adjustment to business spending, which rose at a 2.2 percent rate instead of the 3.1 percent reported previously, also weighed on the GDP reading. Business spending had risen at a 5.3 percent pace in the fourth quarter.

A wider trade deficit and the biggest drop in spending by state and local governments since the second quarter of 1981 also restrained growth in the first quarter.

Home building also slumped after two straight quarters of growth, underscoring the fragility of the housing market's recovery from a three-year downturn. Although a rebuilding of business inventories was a source of growth in the quarter, analysts expect the contribution from restocking to fade in the second half of the year.

Weak demand during the recession forced businesses to slash stocks to record low levels and the rise in inventories in the first quarter was the first in two years. Excluding the boost from inventories, the economy grew at a 0.8 percent pace, far less than the 1.4 percent reported last month.

The GDP report showed after-tax corporate profits rose 5 percent in the first quarter, a much better performance than the 2.1 percent gain estimated last month. Profits increased 6.5 percent in the final three months of 2009.

Consumer Sentiment Higher

According to the Thomson Reuters/University of Michigan's Surveys of Consumers, consumer sentiment gained ground in June, reaching its highest point since January 2008, while reports of job losses were down sharply from a year ago, a survey showed on Friday. The final June reading on the overall index on consumer sentiment rose to 76 from 73.6 in May.

Reports of job losses fell by half since last June, from 65 percent of respondents to 29 percent, the survey showed.

The surveys' barometer of current economic conditions was at 85.6, its highest since January 2008, and also above the 82.9 reading in early June. This compared with 81.0 in May and economist expectations of 82.9.

The index of consumer expectations rose more modestly to 69.8 from 68.8 in May. Economists expected a reading of 70.9. Consumer sentiment is seen as a proxy for consumer spending, which fuels around 70 percent of the U.S. economy.