MarketView for May 1

Summary

 

The Dow Jones Industrial Average closed at its highest level in more than four years on Tuesday after the manufacturing sector expanded at a faster rate than had been previously expected for the month of April, which in turn had the Street worrying less about a slowdown in the economic recovery.

 

The Dow now sits at levels not seen since December 2007. The gains leave the benchmark S&P 500 within about 16 points of a high reached in May 2008. A convincing break above that level could set the market up for some additional gains.

 

Tuesday's rising market, which came in a relatively quiet market with European exchanges closed for May Day holidays, drove the S&P 500 within striking distance of its recent high at 1,422.38. The Dow earlier rose as high as 13,338.66 points, its highest since December 2007.

 

In April, the S&P 500 posted its first monthly decline since November as economic data pointed to a slowing domestic economy and continued flare-ups in the euro zone highlighted the risks of the region's debt crisis.

 

Of the 321 S&P 500 companies that have reported quarterly results so far, 71.3 percent have topped analysts' estimates, according to Thomson Reuters data through Tuesday morning. However, the Nasdaq sold off sharply into the close on weakness in Apple and BlackBerry maker Research in Motion, a possible indicator that the market could struggle to make further headway in the short-term.

 

The Institute for Supply Management said U.S. manufacturing growth came in at its strongest rate in 10 months in April. That reading suggested the economy remains resilient after indications it had lost momentum at the start of the second quarter. Early gains this year have been held in check in recent weeks on worries about U.S. economic growth.

 

Intel hit a 52-week high at $29.05 before closing at $28.95, a gain of 2 percent. One more indicator that money is still making its way into large-cap technology stocks as the market grinds higher.

 

Financial, transportation and energy shares, all of which are linked to economic growth, were strong performers. Financials were also strong with Bank of America posting a 2.5 percent gain to close at $8.31. Chesapeake Energy rose 6.3 percent to $19.60 ahead of the natural gas producer's earnings after the bell.

 

Chesapeake, the nation's No. 2 natural gas producer, was also helped after it said it will name an independent, non-executive chairman to replace Aubrey McClendon. The company will also end a controversial program that has granted McClendon minority stakes in Chesapeake's wells.

 

BP saw a drop in its profits, the result of a fall in production prompted by the sale of oil fields to pay for the Gulf of Mexico disaster. BP ended the day down 1.6 percent to close at $42.70.

 

Huntsman rose 8.9 percent to $15.42 after the firm’s profits nearly tripled on higher prices for its chemicals.

 

Health-care stocks rose, in no small part because of Molina Healthcare, which advanced 3.5 percent to $26.54 after the company's earnings exceeded estimates.

 

PF Chang's China Bistro closed up nearly 30 percent to $51.48 after the restaurant chain agreed to be bought by a private equity firm.

 

The day’s trading volume on the three major equity exchanges was 6.64 billion shares, a number that was below the daily average this year of 6.76 billion shares.

 

Factory Data at 10 Month High

 

Manufacturing grew in April at the strongest rate in 10 months, easing concerns the economy had lost momentum at the start of the second quarter. The Institute for Supply Management reported on Tuesday that its index of national factory activity rose to 54.8 from 53.4 in March. The figure far exceeded expectations. A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 indicates expansion. Manufacturing accounts for about 12 percent of domestic economic activity and has been a cornerstone of the recovery from the 2007-2009 recession.

 

ISM's gauge of employment also rose to its highest level since last June, to a reading of 57.3 from 56.1. The forward-looking new orders component chalked up its best reading in a year at 58.2, up from 54.5.

 

The strong labor figure comes ahead of the government's more comprehensive monthly jobs report due on Friday, which is forecast to show the economy added 170,000 jobs in April, including 22,000 manufacturing positions.

 

The national ISM report was in contrast to some regional manufacturing reports from the industry group that showed the rate of growth slowed last month. It also went against the trend of other recent data that suggested the economy lost some steam as the second quarter got under way, highlighting the bumpy nature of the recovery.

 

The ISM report on factory activity followed data out of China that showed manufacturing there rose to a 13-month high in April, though that reading was slightly below expectations.

 

Auto Industry Looking Up

 

Auto sales rose 2.3 percent in April, helped by strong gains at Toyota and Chrysler as American shoppers looked to replace their aging cars and trucks and the overall economy continued to show signs of strength.

 

The annual sales rate in April was 14.4 million, in line with the March rate, but down slightly from the 14.6 million pace reported in the first quarter. Auto sales are one of the earliest snapshots of American consumer demand and the metric has proven to be a bright spot in the economy. Despite signs that the economy might lose steam, automakers said they remained optimistic.

 

Chrysler and Toyota were had the largest gains within the U.S. market in April, while General Motors, Ford, Honda and Nissan all lost share in the month, according to Autodata Corp.

 

Toyota sales were up 11.6 percent, led by passenger cars, specifically the Camry sedan and the Prius hybrid. Chrysler sales were up 20 percent on the strength of models like the 300 sedan.

 

Both GM and Ford reported smaller-than-expected declines during the month. GM reported an 8.2 percent drop while Ford's sales fell 5 percent.

 

GM also raised its full-year sales outlook for the overall industry to as much as 14.5 million vehicles. At the high end of its forecast range, GM projects 2012 sales to be 13.3 percent higher than 2011 levels.

 

"Despite some persistent headwinds that have come in and out of the market, whether it is the European debt crisis or some uncertainty around fuel prices, we continue to expect gradual improvement in the economy going forward," GM sales executive Don Johnson told analysts and reporters on a conference call.

 

GM warned that domestic sales growth over the next few months would slow compared with the first quarter, when the sales pace outstripped even the most bullish estimates.

 

The industry is now on the mend after its near-collapse in 2009 when GM and Chrysler filed for bankruptcy and sales fell to 10.4 million. By contrast, vehicle sales averaged around 16.7 million a year between 1998 and 2007.

 

GM said sales of its newly launched Chevrolet Sonic and the Buick Verano helped the automaker raise its average prices by about $150 per vehicle.

 

The April results come after a stronger-than-expected first quarter for the auto industry, which benefitted from warmer-than-usual weather and a rise in fleet sales that cannot be replicated in the months ahead. Therefore, the sales rate in the second quarter of 2012 would be slower than the first-quarter pace, which reached 14.6 million.

 

For the full year, GM now sees the U.S. auto industry selling between 14 million and 14.5 million vehicles, up from its previous outlook of 13.5 million to 14 million. In 2011 auto sales were about 12.8 million.

 

For 2012, Ford maintained its previous forecast of domestic sales of between 14.5 million and 15 million, which includes medium- and heavy-duty trucks. That would be an estimated 14.2 million to 14.5 million in the light vehicle sales that most of the industry uses as a benchmark.

 

During the first four months of the year, passenger car sales were up 15 percent, while light truck sales rose just 5.5 percent. In that time, average fuel prices in the United States neared their record price of $4 a gallon.

 

Chrysler, controlled by Fiat, said sales rose 20 percent to 141,165 vehicles, compared with 117,225 in the same month last year. Chrysler rose in April on the strength of models like the Chrysler 300 sedan. The No. 3 domestic automaker has also offered incentives to its dealers to push them to sell more cars and trucks.

 

GM and Ford said their declines were due to three fewer selling days in April 2012 compared with the year-ago month, a quirk in the calendar that has happened just twice in the past 10 years. When adjusted for the fewer selling days, Ford said its April sales rose 7 percent while GM rose 3 percent. On that same basis, Toyota sales rose 25.5 percent.

 

GM's April sales decline to 213,387 new vehicles included a 25 percent drop in fleet sales. Ford sold 180,350 new vehicles compared with 189,778 a year earlier.

 

Sales of the Ford Escape SUV, which is expected to be replaced later this year, fell by a fifth while Fiesta subcompact sales dropped 44 percent. Executives said the Fiesta sales decline was due in part to consumers choosing the Focus compact car over its smaller stable mate.

 

Toyota's sales gain was helped by the lower sales from a year ago, when its inventory started to feel supply shortages related to the March 11 earthquake and tsunami in Japan.

 

GM shares ended 1.3 percent higher at $23.31, while Ford shares fell 0.4 percent to $11.23.