MarketView for March 27

Summary

The major equity indexes were lower again on Thursday, erasing most of the S&P 500's year-to-date gain, as banking and technology stocks led the selloff. More specifically, the benchmark S&P 500 is now nearly flat for the year after falling almost 1 percent this week as many of the market's biggest trading favorites lost their momentum.

A steep drop in Citigroup, which suffered its largest daily decline since November 2012, helped push the S&P 500 lower. The S&P financial index .SPSY lost 0.6 percent and was the worst-performing sector. Citigroup fell 5.4 percent to $47.45 and is now unable to buy back $6.4 billion of its own shares or increase its dividend payout. The reason given by the Fed was that Citi was not sufficiently prepared to handle a potential financial crisis. Word on the Street is that Citi officials had not expected the rejection.

Not unexpectedly, the Fed also rejected Zions Bancorp's plan late on Wednesday. Shares of Zions Bancorp fell 1.2 percent to end the day at $29.83.

Nonetheless, the S&P 500 managed to hold above the 1,840 level, which has recently acted as support, as the end of the quarter approached and money managers engaged in "window dressing," adjusting positions to improve the look of their portfolios. At the close, the S&P 500 was up just a fraction of a point for the year. The Russell 2000 index, a widely use gauge for small-cap stocks, fell 0.4 percent to 1,151.44.

Big tech names also suffered, Google was off 1.6 percent at $1,114.28, and Microsoft was down 1.1 percent at $39.36, while Amazon.com lost 1.4 percent at $338.47.

The latest data indicated that the economy grew a bit faster than previously estimated in the fourth quarter, while new claims for jobless benefits dropped to a near four-month low last week. However, contracts to buy previously owned homes fell in February to their lowest level since October 2011.

The United States and the European Union on Wednesday agreed to prepare possibly tougher economic sanctions in response to Russia's annexation of Ukraine's Crimea territory. While Western leaders had said earlier that they would hold off on new sanctions unless Moscow takes further destabilizing actions in the region - which Russian President Vladimir Putin last week said he wasn't interested in doing - investors are concerned about the potential fallout of a prolonged conflict.

Concerns over the effect of sanctions on Russia's energy sector and global supplies helped push crude oil prices and the S&P energy index higher. In addition, Exxon Mobil gained 1.6 percent to close at $96.24 after Bank of America Merrill Lynch boosted its rating on the stock to a "buy.”

Approximately 6.5 billion shares changed hands on the major equity exchanges,  a number that was slightly below the 6.9 billion average so far this month, according to data from BATS Global Markets.

The Economy Continues to Improve

The economy grew a bit faster than previously estimated in the fourth quarter and new claims for jobless aid dropped to a near four-month low last week, suggesting the economy has plenty of momentum to break out of its winter chill.

Housing, however, will probably take a while to pull out of its recent slump as contracts to buy previously owned homes fell to their lowest level in almost 2-1/2 years in February. Still, the better economic picture could see the Federal Reserve raising interest rates earlier than markets expect, economists said.

Gross domestic product expanded at a 2.6 percent annual rate, the Commerce Department said on Thursday, up from the 2.4 percent pace it reported last month. The revision, which was broadly in line with economists' expectations, reflected a stronger pace of consumer spending than previously estimated.

Although the revised pace of expansion was still significantly slower than the 4.1 percent rate logged in the July-September quarter, the composition of growth in the fourth quarter suggested underlying strength in the economy.

Consumer spending, which accounts for more than two thirds of U.S. economic activity, was raised sharply higher but the pace of restocking by businesses was not as robust as previously estimated. Business spending on equipment was a bit stronger than previously estimated and the decline in government outlays was a little less pronounced.

A separate report from the Labor Department indicated that initial claims for state unemployment benefits fell by 10,000 claims to a seasonally adjusted 311,000 claims, the lowest level since last November. The four-week average, which gives a better picture of underlying labor market conditions, hit its lowest level since last September.

The National Association of Realtors said its pending home sales index, based on contracts signed last month, fell 0.8 percent to its lowest level since October 2011. Housing has been hit by cold weather, a tight supply of properties for sales, as well as high mortgage rates. High house prices are also sidelining potential buyers, especially those venturing into the market for the first time.

The revision to fourth-quarter growth suggested the economy had momentum as 2013 ended and should regain strength once the effects of the unusually cold and snowy winter that depressed activity at the beginning of this year start to abate.

Growth in the first quarter is expected to have slowed to a pace of around 2 percent. Output has also been temporarily dampened by the expiration of long-term unemployment benefits, cuts to food stamps and businesses placing fewer orders with manufacturers as they work through a pile of unsold goods in their warehouses.

Consumer spending grew at a brisk 3.3 percent rate, reflecting strong growth in services. That reflected increased spending on health care and utilities. Spending on long-lasting manufactured goods was also revised higher. Spending was previously reported to have increased at a 2.6 percent rate. The pace in the fourth quarter was the quickest in three years and contributed more than two percentage points to GDP growth.

Inventories, previously reported to have risen by $117.4 billion in the fourth quarter, were revised down to $111.7 billion. The downward revision, which is positive for near-term economic growth, resulted in inventories not contributing to growth in the quarter.

With fewer stocks on their shelves or in their warehouses, businesses now are more likely to need to place new orders or otherwise ramp up production to meet demand.

Business spending on equipment in the fourth quarter was revised up, but outlays on non-residential structures were lowered. Spending on home building was not as weak as previously estimated.