MarketView for March 13

 

 

Summary

 

The stock market posted its best day this year, with Tuesday's late spark coming from JPMorgan Chase & Co after the bank announced it will raise its dividend. JP Morgan's news preceded the Federal Reserve's release of results from its latest stress tests of banks. Most of the top banks did well and their shares extended gains in trading after the closing bell.

 

Stocks advanced throughout the session, helped by stronger-than-expected retail sales and relatively optimistic comments from the Federal Reserve, which said recent strains on financial markets were easing.

 

The S&P 500 closed at a level not seen since June 2008 in a sign that the market foresees more strength in the U.S. economy in coming months. The index - up 11 percent this year – is now up for five straight days and appears set for more gains.

 

The Nasdaq hit an intraday high at 3,039, its highest mark since November 2000. And Tuesday marked the first time that the Nasdaq closed above 3,000 and the Dow ended above 13,000 on the same day.

 

The S&P 500's move above 1,390 puts the broad-market index in position to surpass 1,400, which could bring out more buyers. The S&P 500 index reached 1,396.13, its highest intraday level since June 2008.

 

Banks led the way with a powerful kick into the close. JP Morgan Chase closed up 7 percent to $43.39 and was the Dow's top gainer after it announced that it will raise its dividend and unveiled a $15 billion stock-buyback program, with as much as $12 billion authorized for repurchase this year. Bank of America saw a gain of 6.3 percent in its share price to $8.49.

 

The stress test results for banks, which were released after the market closed, were not all rosy. The Fed said Citigroup and SunTrust were among the banks that fared the worst under the supervisory stress ratios. Citigroup shares fell 2.2 percent to $35.63 in late trading while SunTrust slid 3 percent to $21.90. MetLife fell 3.3 percent to $38.14.

 

The CBOE Volatility Index saws levels not seen since mid-2007. Its 14-day moving average is at its lowest since last June.

 

The Fed said the economy was "expanding moderately," though growth still faced significant downside risks. The assessment of the economy's expansion was unchanged from the Fed's January statement. Data in the United States once again indicated a slowly improving domestic economy, as retail sales recorded their largest gain in five months in February despite rising gasoline prices.

 

Euro-zone finance ministers gave final approval to a second bailout for Greece, and a German index of analysts' and investors' sentiment rose much more than expected in March.

 

The European Union, the United States and Japan formally asked the World Trade Organization to settle a dispute with China over restrictions on exports of raw materials, including rare earth elements critical to electronics makers. Beijing said the export curbs were motivated by environmental concerns, adding that it would defend itself.

 

Shares of Molycorp, a rare earth oxide producer that owns a rare earth project outside of China, rose 3.2 percent to $30.83. The company's stock has seen daily moves of at least 4 percent more than a dozen times this year.

 

Volume was light, with about 7.51 billion shares changing hands on the three major equity exchanges, a number that was below last year's daily average of 7.84 billion shares.

 

Retail Sales Up Sharply

 

Retail sales posted their largest gain in five months in February, with confidence in the economy going forward strong enough to send consumers out purchasing new cars and other goods even as they paid more for gasoline.

 

In the latest sign of economic improvement, the Commerce Department reported that retail sales rose 1.1 percent last month, after a 0.6 percent increase in January. The sales gains were broad-based and numbers for previous months were revised higher, suggesting rising employment was cushioning consumers from a steep run-up in gasoline prices.

 

With sales for December and January revised higher, the report suggested consumer spending has not been as weak as previously thought. Consumer spending, which accounts for about 70 percent of U.S. economic activity, had been reported as being flat in the three months through January, when adjusted for inflation.

 

The report spurred some economists, including those at Goldman Sachs, to raise their forecasts for first-quarter gross domestic product. Goldman Sachs now expects GDP to increase at a 2.0 percent annual rate, instead of 1.8 percent. The consensus of economists on the Street is that fourth-quarter GDP growth will be revised upward to as high as a 3.5 percent pace from 3.0 percent when the final reading is released later this month.

 

Sales last month were buoyed by a 1.6 percent rise in sales of motor vehicles, reflecting pent-up demand and growing confidence in the economy as job creation speeds up. If you exclude autos, retail sales advanced 0.9 percent, building on January's upwardly revised 1.1 percent gain.

 

A separate report from the Commerce Department showed auto dealers raced to rebuild stocks in January to meet the growing demand. Motor vehicle inventories increased in January at their quickest pace since July 2010, giving a boost to overall business inventories.

 

Sales at gasoline stations surged 3.3 percent to a record $46.9 billion - a figure that reflects higher gasoline costs. The percentage gain was the largest since March last year and followed a 1.9 percent increase in January.

 

Excluding autos and gasoline, sales rose 0.6 percent in February after increasing 1.0 percent the prior month. Gasoline accounted for 11.5 percent of retail sales in February.

 

Auto dealerships and gas stations were not the only businesses to enjoy higher receipts. Clothing sales recorded their largest increase since November 2010. Mild weather has boosted traffic to shopping malls even though retailers have had to offer huge discounts to clear shelves of winter clothing.

 

Sales of building materials and garden equipment also registered sturdy gains, which economists said may have also partly reflected the weather. Consumers also spent at restaurants and bars, on hobbies and on electronics and appliances. Furniture sales, however, fell.

 

The core retail sales number, which excludes automobiles, gasoline, and building materials, chalked up a 0.5 percent gain. That same index was up 1.0 percent in January. Core sales correspond most closely with the consumer spending component of the government's gross domestic product report.

 

Fed Remains Steadfast

 

The Federal Reserve on Tuesday provided few clues on the prospects for further monetary easing, offering just a slight upgrade to its economic outlook while restating concerns about the high level of unemployment. In its statement, the Fed indicated that it expects "moderate" growth over coming quarters with the unemployment rate declining gradually; in January, it said it expected "modest" growth.

 

It also said a recent spike in energy costs would likely push up inflation, but only temporarily. Over a longer stretch, the Fed said inflation would likely run at or below the its 2 percent target.

 

"Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated," the central bank said in a statement after a one-day meeting.

 

As widely expected, the Fed reiterated its expectation that overnight interest rates would remain near zero until at least through late 2014 and that it would continue its program to reweight its portfolio toward longer-term securities. That program, known as "Operation Twist," expires at the end of June.

 

Richmond Federal Reserve Bank President Jeffrey Lacker dissented against the decision because he did not expect economic conditions to warrant ultra-low rates until late 2014. In January, he had dissented against the decision to offer a time frame for the first expected rate hike.

 

Fed officials appear uncertain over whether the progress in reducing unemployment can be maintained given still-sluggish economic growth. Therefore it is well within the realm of possibility that the Fed will launch another round of bond buying later in the year.