MarketView for June 26

Summary 

Stocks rallied for a second day on Wednesday, recouping some recent losses on reduced concern that the Federal Reserve will begin to withdraw its stimulus in the near future.

The broad-based advance lifted the S&P 500 above the 1,600 threshold for the first time since last Thursday. Stocks have recently sold off after the Fed said it is moving closer to reducing its monthly bond-buying efforts, but the last two days of buying show some believe the market has overreacted.

The S&P 500 is up 1.9 percent over the past two sessions, its best two-day rally in three weeks following a massive selloff. Last week, the S&P 500 index posted its worst week since April. The benchmark index remains 4 percent below its all-time closing high of 1,669 reached on May 21.

A1l 10 of the S&P 500 industry sectors gained, with the healthcare and utilities sectors leading the way. Johnson & Johnson was the S&P 500's second-largest mover. The healthcare company's stock rose 1.9 percent to close at $86.99.

The rally followed data showing the economy grew at an annual rate of 1.8 percent in the first quarter, well below expectations of a 2.4 percent annual rate.

While the GDP data looks backward and includes the start of cutbacks in federal spending, analysts said it could influence the Fed's considerations of whether the economy is strong enough for it to begin scaling back its $85 billion a month in bond purchases. The data will probably keep the Fed from cutting back on QE3, and will likely be quite supportive for stocks.

Stocks have been closely tied to the central bank's easy money policy, with the Dow Jones Industrial Average and the S&P 500 hitting a series of record closing highs as investors bet that the bond buying would remain in place, and then dropping dramatically on hints that the stimulus could be reduced before the end of the year.

Treasury bond prices rose, causing bond yields to fall. Lower bond yields enhance the appeal of equities. The CBOE Volatility Index, Wall Street's favorite barometer of investor anxiety, fell 6.8 percent to 17.21.

Tech companies' shares advanced following bullish comments from several analysts.

Adobe Systems rose 3 percent to $45.68 after Jefferies & Co upgraded the stock to "buy" from "hold," citing expectations for more new users.

Microsoft gained 2 percent to $34.35 after Morgan Stanley raised its rating to "overweight" and increased its price target on the stock to $40.

On the downside, gold stocks slid as the precious metal fell to its lowest in almost three years, putting it on course for a record quarterly loss. Gold Fields fell 7.5 percent to close at $4.70 and Barrick Gold was down 8.3 percent at $14.78. Newmont Mining was one of the S&P 500's largest decliners, falling 5.9 percent to $27.22.

Apollo Group, owner of the University of Phoenix, was the S&P 500's largest decliner, falling 10.2 percent to close at $17.39 a day after reporting its third-quarter results.

Volume was slightly above average, with 6.48 billion shares changing hands on the three key equity exchanges, a number that was above the daily average so far this year of about 6.36 billion shares.

First Quarter GDP Estimate Falls Sharply

The Commerce Department drastically cut its estimate for first-quarter economic growth on Wednesday, offering a cautionary note on the recovery as the Federal Reserve ponders curtailing its massive monetary stimulus.

Gross domestic product expanded at a 1.8 percent annual rate in the quarter, the Commerce Department said. The economy was previously reported to have grown at a 2.4 percent pace after a gain of just 0.4 percent in the final three months of last year.

Almost all categories were revised lower, with the exception of home construction and government. The biggest surprise was consumer spending, which grew at a 2.6 percent pace, not the 3.4 percent rate previously estimated.

The revision to consumer spending, which accounts for more than two-thirds of U.S. economic activity, sliced more than a half percentage point off the GDP growth rate.

Economists cautioned against reading too much into the data given its backward-looking nature, but said it could weigh on the Fed as it considers scaling back its bond buying.

Fed Chairman Ben Bernanke said last week that the central bank could trim the $85 billion in bonds it is buying each month sometime later this year and likely bring the program to a close by mid-2014. Those comments led to a sharp selloff in stock markets and drove the yield on the benchmark 10-year Treasury note to a nearly two-year high.

However, a range of strong economic data on Tuesday - from business spending plans to home prices - bolstered investor sentiment. The GDP report showed that homebuilding grew at a 14.0 percent rate in the first quarter, but a large increase in mortgage rates on the back of Bernanke's remarks threatens to cool the sector.

Interest rates on fixed 30-year mortgages jumped more than a quarter point last week to an average 4.46 percent, the Mortgage Bankers Association said. That killed off refinance activity, although demand for loans to purchase a home edged higher.

The revision to consumer spending largely reflected weak outlays that non-profits made on medical care services on behalf of consumers, which are tied to lower government spending on health care.

Even given the revision, consumer spending picked up from the fourth quarter despite a rise in taxes, and recent gains in consumer sentiment suggest households are not pulling back.

Growth in the first quarter was also weighed down by weak exports, which contracted at a 1.1 percent pace in the first quarter in a likely reflection of a global economic slowdown. They had previously been reported to have expanded.

Business spending barely grew, with investment on nonresidential structures declining more sharply than previously reported. The drop in spending on nonresidential structures was the first in two years.