MarketView for May 25

Summary  

Wall Street ended a three-day losing streak on Wednesday with all three major equity indexes ending the day in positive territory as recent underperformers led a thinly traded rally that wasn't seen as strong enough to overcome worries about waning global demand.

The S&P 500 hit its lowest intraday level since April 19 on Tuesday, and recent weak breadth suggested selling had gone too far for now. Energy and materials stocks, which have lived and died by the Street’s hopes for a robust global recovery, have returned to their winning ways. Further upside was seen as limited, given headwinds from Europe and the prospect of an environment without supportive monetary policy.

Energy shares gained on an unexpected drop in distillate stockpiles, which sent heating oil futures higher. Exxon Mobil rose 0.8 percent to close at $81.

Flextronics International contributed to the larger gains in the Nasdaq, rising 3.8 percent following an upgrade from Raymond James. Homebuilders also advanced after luxury builder Toll Brothers said orders rose in the latest quarter as low home prices induced its target market of the affluent to start buying again. The stock climbed 1.8 percent to close at $20.63.

New orders for long-lasting durable goods posted their largest drop in six months in April as aircraft and motor vehicle orders tumbled, a government report showed. Equities initially traded lower on the news, which, along with recent weak data on manufacturing figures from the Atlantic region as well as disappointing New York and Philadelphia Fed manufacturing surveys, pointed to a slowdown in the pace of economic growth.

American International Group fell 4 percent to $28.28, below the $29 offer price of the 300 million shares being sold by the Treasury and the bailed-out insurance company.

More than 60 percent of stocks traded on both the New York Stock Exchange and the Nasdaq ended in positive territory. However, volume was light, with about 6.69 billion shares changing hands on the three major exchanges, a number that was well below last year's daily average of 8.47 billion shares traded.

Durable Goods Orders Fall

According to a report released by the Commerce Department Wednesday morning, new orders for durable goods posted their largest drop in six months in April after a steep fall in demand for transportation equipment, suggesting some cooling in factory activity. Durable goods orders declined 3.6 percent last month, worse than expectations for a 2.2 percent fall. March's orders were revised up to a 4.4 percent rise from a 4.1 percent increase.

While durable goods orders are extremely volatile, the report added to a raft of recent data suggesting that the loss of economic growth momentum encountered as the year started persisted into the early part of the second quarter. It also underscored the magnitude of the impact of supply chain disruptions from the Japanese earthquake on the economy. So far, data such as retail sales and industrial production have been generally lackluster.

The weak durable goods report could prompt economists to lower their forecasts for second-quarter growth, currently ranging between 2.5 and 3.5 percent. The government is expected to report on Thursday that the economy grew at a still sluggish 2.1 percent annual rate in the first quarter, rather than the 1.8 percent pace it estimated last month.

Orders last month were pulled down by a 4.5 percent fall in motor vehicle bookings, the largest decline since August, tracking an 8.9 percent dive in auto production during that month.

U.S. manufacturing contracted for the first time in 10 months in April as a result of supply chain disruptions in the wake of the March earthquake. The economic recovery that started in the second half of 2009 has been led by the manufacturing sector.

However, the durable goods data, along with several regional surveys are all pointing to a moderation, with most of the weakness concentrated in the motor vehicle production sector.

Orders were also weighed down by a 30 percent plunge in volatile aircraft bookings. Boeing took in just two aircraft orders, sharply down from the 98 it received in March, according to information posted on the plane maker's website.

Yet, even excluding transportation, durable goods orders fell 1.5 percent after a 2.5 percent rise in March. There were declines almost across the board, with only orders for computers and electronic products bucking the trend. A closely watched proxy for business spending -- nondefense capital goods orders excluding aircraft -- fell 2.6 percent last month after increasing 5.4 percent in March.

Shipments of nondefense capital goods orders excluding aircraft, which go into the calculation of gross domestic product, fell 1.7 percent. Inventories rose 0.9 percent after increasing 1.7 percent in March. Unfilled orders edged up 0.2 percent.