MarketView for June 4

Summary 

The major equity indexes closed out the day lower on Tuesday, as growth-oriented sectors felt the brunt of the speculation over the idea that the Federal Reserve may reduce its economic stimulus. Moreover, the recent declines are not surprising given this year's hefty rally, which had been driven partly by continued economic support from the Fed. Yet, the S&P 500 index is still up 14.4 percent for the year. The decline by the Dow Jones Industrial Average ended a 20-week-long streak of Tuesday gains.

All three major equity indexes had been down more than 1 percent during the session. Intraday market volatility has picked up since minutes from the central bank's most recent meeting and recent remarks by Chairman Ben Bernanke heightened concerns the Fed may reduce its bond-buying program sooner than expected.

Growth-oriented sectors were among the hardest hit, a switch from last week when investors booked profits in high-dividend paying shares. The S&P financial index was down 0.9 percent, while the telecommunications index was up 0.9 percent.

Kansas City Federal Reserve Bank President Esther George, who has been a steady critic of the program and has voted against it at every Fed meeting so far this year, again urged the Fed to ease off its aggressive bond purchases. George said slowing bond buying would help wean financial markets off their dependence on the Fed’s ultra-easy monetary policy.

Dollar General fell 9.2 percent to close at $48.64, the worst percentage performer on the S&P 500, after the discount chain cut the top end of its full-year profit forecast. The company warned of moderating sales growth and declining margins as frugal shoppers make it difficult to raise prices.

Trade Drags on Economy

The Commerce Department reported on Tuesday that the country’s trade gap increased 8.5 percent to $40.3 billion. March's shortfall on the trade balance was revised to $37.1 billion from the previously reported $38.8 billion. When adjusted for inflation, the trade gap increased to $47.6 billion from $44.6 billion in March.

The widening of the so-called real trade deficit indicated that trade continues to weigh heavily on growth early in the second quarter. Trade subtracted a fifth of a percentage point from first-quarter gross domestic product.

Part of the overall problem is that the economy has hit a speed bump, with higher taxes and government spending cuts crimping consumer spending and weighing on manufacturing activity. Growth estimates for this quarter currently range between 1.2 and 2 percent annually. The economy grew at a 2.4 percent rate in the first three months of the year.

The three-month moving average of the trade deficit, which irons out month-to-month volatility, slipped to $40.42 billion in the three months to April from $41.22 billion in the prior period. Annual revisions showed the trade deficit in 2012 was smaller than previously reported, with exports revised higher.

In April, imports of goods and services increased 2.4 percent to $227.7 billion. The rebound in imports was mitigated by the lowest value of petroleum imports since November 2010.

Exports of goods and services increased 1.2 percent to $187.4 billion, the second highest on record. The gains came as the value of motor vehicles and parts exports rose to the highest on record. Exports of consumer goods were also a record high.

Strong export growth helped to lift the economy out of the 2007-09 recession, but momentum has waned in recent months against the backdrop of slowing global demand, especially in China and recession-hit Europe.

The impact from U.S. dollar strength earlier in the year is also taking steam out of export growth. U.S. exports to the 27-nation European Union fell 7.9 percent in April. Exports to the EU in the first four months of 2013 were down 7.4 percent compared to the same period in 2012.

Exports to the United Kingdom were the lowest since May 2009. Exports to China, which have been growing more slowly than in recent years, declined 4.7 percent in April.