MarketView for May 19

Summary 

Share prices moved higher on Thursday sending all three major equity indexes into positive territory for the day. One of the standouts in the day’s session was LinkedIn, as its shares doubled in their trading debut.

The downside is that the S&P 500 index is running into resistance after its recent bounce, and many on the Street have resigned themselves to a patch of economic weakness over the summer. While stocks have been resilient, only falling 1.5 percent, the S&P is struggling to make headway above 1,340, an area that has met with repeated bouts of selling.

Economic data painted a cloudy picture as slowing factory activity in the mid-Atlantic region and falling sales of existing homes offset a drop in weekly jobless claims that suggested the labor market was on track for recovery.

Shares of LinkedIn, the business social networking company, more than doubled its IPO price in a jump reminiscent of the heyday of investors' love affair with Internet stocks. LinkedIn rocketed to an intraday high of $121.97 -- as much as 171 percent above its initial offering price of $45. The shares closed at $94.25, up 110 percent.

Investors have been rotating into defensive areas of the market, such as healthcare and utilities, which are less sensitive to market weakness.

Semiconductor shares fell after Goldman Sachs cut its rating on Intel, citing slowing processor shipments, rising competition, and record capital expenditure levels this year. The firm also lowered its rating on Applied Materials as part of a wider downgrade on the semiconductor equipment sector. Intel closed down 1.4 percent to $23.54 and Applied Materials fell 1.2 percent to $14.33.

Stocks, bonds, gold and the euro are expected to fall in the three months after the upcoming end of the Fed's second massive bond-buying operation, also known as quantitative easing.

About 6.2 billion shares were traded on Thursday on the three major exchanges, as compared to an average of about 8.4 billion last year.

Second Quarter Looks Muted

Weak home sales data and factory activity data showed an economy stuck in low gear although a drop in claims for jobless aid offered hope the labor market's recovery was on track. Thursday's reports suggested growth was being hampered by a combination of bad weather at home and supply disruptions caused by the March earthquake in Japan. However, the economy should regain momentum by the second half of the year.

First-time claims for state unemployment benefits fell 29,000 to 409,000 last week, the Labor Department said. The larger-than-expected decline eased fears that a large increase last month reflected a fundamental deterioration in the jobs market, buttressing the view that the run-up was due to auto plant shutdowns and other one-time factors.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index -- a gauge of factory activity in the Mid-Atlantic region – fell to a seven-month low. The flow of orders and shipments slowed significantly, while unfilled orders and inventories dropped. Employers, however, added workers.

While the Mid-Atlantic region does not have a high concentration of auto assembly plants, part of the slowdown in factory activity reflected supply chain disruptions, which should prove to be temporary. Nonetheless, that report, which together with data on Monday showing factory activity in New York State was the slowest in five months during May, implied manufacturing nationwide cooled further this month.

A Fed report on Tuesday indicated that motor vehicle output fell 8.9 percent in April, causing manufacturing to contract for the first time in 10 months.

Estimates for second-quarter U.S. economic growth are currently ranging between a 3 percent and a 3.5 percent annual pace, but could go lower as the impact of the supply chain disruptions becomes more evident. The economy grew at a 1.8 percent rate in the first three months of this year after a 3.1 percent clip in the fourth quarter of last year.

Although some of the factors hindering growth may prove temporary, housing will remain a headache. Sales of previously owned homes fell 0.8 percent last month to an annual rate of 5.05 million units, the National Association of Realtors said. Housing is buckling under the weight of foreclosed properties, which are depressing prices.

The data suggested the Fed will be in no hurry to shift from its ultra-easy monetary policy stance. New York Fed President William Dudley and Chicago Fed President Charles Evans reiterated the consensus view at the Fed that the economy still needs support.  Dallas Fed President Richard Fisher one of the Fed's most strident inflation hawks, said he was still not sure when the right time might be to begin pulling back on the stimulus.

Meanwhile, the Street shrugged off the weak housing and manufacturing data, focusing instead on the drop in unemployment insurance claims. While the initial claims decline was more than economists' expectations for a fall to 420,000, they remained anchored above the 400,000 level that is normally associated with stable job growth for a sixth straight week.

The claims data covered the survey period for the Government's closely watched employment report for May, which will be released early next month. Claims rose 5,000 between the April and May survey periods, indicating a loss of momentum in the pace of labor market improvement.

Employers added 244,000 jobs in April, the most in 11 months. However, the unemployment rate rose to 9 percent from 8.8 percent in March. Though home sales continue to struggle, gains in employment are helping to ease mortgage defaults. Mortgage delinquencies 90 days past their due date in the first quarter were the lowest since the beginning of 2009, the Mortgage Bankers Association said.