MarketView for March 13

Summary

The major equity indexes edged higher on Wednesday, with the Dow Jones Industrial Average rising for the ninth straight session to another record, buoyed by surprisingly strong retail sales that suggested the economy is gaining momentum.

The Dow Jones industrial average's nine-day winning streak is the longest consecutive run since November 1996. The S&P 500 index is within striking distance of its all-time closing high of 1,565.15 and about 1 percent away from all-time intraday high of 1,576.09 - both set in 2007. The Dow is up 10.3 percent for the year, while the S&P 500 is up 9 percent.

Nonetheless, trading volume was light. Moves have been muted in recent days as investors consolidate positions after a strong run-up in the first three months of the year. Still, weakness in stocks has been met with buying, which helped propel the market's advance.

IBM and Boeing were the Dow's two top gainers. IBM ended the day up 0.7 percent to $212.06, while Boeing rose 0.7 percent to end the day at $84.75 at the close.

Signs of strength in the economy and the Federal Reserve's easy monetary policy have helped equities market accelerate their momentum. In addition, Wednesday's retail sales report reinforced the view that the economy has momentum, despite the obstacles the recovery is facing. Sales increased 1.1 percent in February, the largest increase since September.

Investors had been looking for signs of any impact on spending from stubbornly high unemployment and a higher payroll tax that went into effect at the start of the year. It simply is not there. Consider that Coach rose 1.8 percent to $49.67 after Citigroup raised its rating on the luxury leather goods company's stock to "buy" from "neutral.

Walgreen rose 4.2 percent to $42.78 after UBS raised its rating to a "buy" from "neutral", and lifted its price target to $48 from $41.

On the down side, Express shares slid 3.2 percent to $18.25 after the apparel retailer posted fourth-quarter earnings and said it was off to a slow start in the first quarter, while Spectrum Pharmaceuticals shares lost 37.3 percent to $7.79 after the biotechnology company forecast full-year sales well below analysts' estimates.

Volume was below average, with approximately 5.5 billion shares changing hands on the three major equity exchanges, as compared with the 2012 average daily closing volume of about 6.45 billion shares.

Retail Sales Exceed Expectations

Retail sales expanded at their fastest pace in five months during the month of February, the latest sign of momentum for an economy facing headwinds from higher taxes and higher priced gasoline. The sales numbers came on the heels of strong gains in employment and manufacturing. However, the improvement in the economic picture is likely insufficient to compel the Federal Reserve to reduce its monetary policy support.

According to a report released on Wednesday by the Commerce Department, retail sales increased 1.1 percent, the largest increase since September, after a revised 0.2 percent gain in January. That was well above Street expectations for a 0.5 percent rise.

Core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of the government's measure of gross domestic product, rose a stronger-than-expected 0.4 percent. The healthy sales gains came despite the end of a 2 percent payroll tax cut and a hike in tax rates for wealthy Americans at the start of the year.

The stock market rally, rising home prices and steady job gains, which are starting to push wages higher, have helped consumers. Households are also cutting back on saving. The firming economic tone was also underscored on Wednesday by a survey showing corporations grew more confident in the ongoing recovery during the first quarter. However, they remained hesitant to step up hiring.

While employment growth quickened last month, the Fed needs to see a sustained stretch of even stronger job growth to step away from its current monetary policy stance. The central bank is buying $85 billion in bonds per month and has said it would keep up its asset purchases until it sees a substantial improvement in the labor market outlook.

The gains in core sales in the first two months of the year suggested that consumer spending, which accounts for about 70 percent of the U.S. economy, may only slow a bit from the 2.1 percent annual rate notched in the last three months of 2012. It was expected that the increased tax burden and higher gasoline prices would weigh more heavily on consumer spending.

Part of the rise in retail sales reflected an increase in the price of gasoline of 35 cents per gallon, which helped lift sales at service stations by 5 percent, the largest gain since August. But there was also strength in sales at auto dealerships, which rose 1.1 percent. Excluding autos, retail sales increased 1 percent, the most in five months.

Sales at building materials and garden equipment suppliers increased 1.1 percent, reflecting gains in home building. Sales also rose at clothing and general dealer stores. Online shopping receipts also moved higher

However, delays in processing tax refunds probably hurt sales at restaurants and bars, and at sporting goods, hobby, book and music stores, which all registered declines. Sales of electronics and appliances also slipped, as did furniture sales.

Growth prospects for the first quarter were further enhanced by a second report from the Commerce Department showing business inventories rose by the most in more than 1-1/2 years in January. Retail inventories excluding autos - which go into the calculation of gross domestic product - recorded their largest increase since August 1995. Inventories had subtracted 1.6 percentage points from fourth-quarter GDP.