MarketView for May 3

Summary

 

Stocks fell on Thursday as economic data sent mixed signals on the recovery a day before the April payrolls report. Slower-than-expected growth in the dominant services sector drove the day’s trading activity. The retail sector dragged the market lower after several chains, including Target and Gap fell after missing April sales estimates.

 

Market expectations for Friday's non-farm payrolls report have fallen this week. The expectation now is that the economy added 125,000 to 150,000 jobs in April. There were even rumors that the number would come in below 100,000. Still, the S&P 500 kept up its flirtation with new four-year highs, although it has struggled to rise above resistance at the 1,400 level.

 

Shares of Green Mountain Coffee Roasters lost 47.8 percent to $25.87 a day after the company badly missed sales estimates for the second time in three quarters. The stock was the second largest drag on the Nasdaq 100.

 

After the closing bell, LinkedIn reported better-than-expected revenue and profit, racking up strong growth from services that help companies find and hire employees. The stock rose 7 percent to $117.10 in extended trading. During regular trading, the stock had closed at $109.41, up 2.8 percent.

 

With Thursday's decline, the S&P 500 has fallen close to its 50-day moving average of around 1,386.48. The benchmark index has retraced about 50 percent of its move off its closing low of 1,358.59 on April 10.The S&P 500 slipped in April, the first monthly drop since November, on softening domestic data, coupled with flare-ups in the euro zone's debt crisis.

 

In Thursday's regular session, retail stocks fell after several large chains missed sales estimates in April. The results were a troubling sign for consumer spending. For example, Gap fell 1.6 percent to $28.67, while Target fell 2.5 percent to $56.55.

 

Initial jobless claims posted their largest weekly drop since May 2011 and countered Wednesday's weaker report on private-sector hiring.

 

General Motors lost 2.4 percent to $22.37 on word from the Street that the company's North America outlook implied results for the first nine months of the year would fall short of expectations.

 

Health Net slid 24.9 percent to $27.26 on missed earnings expectations and the insurer cut its forecast.

 

Of the 391 companies in the S&P 500 index reporting results, 68.3 percent have exceeded expectations, according to Thomson Reuters data through Thursday morning.

 

In the mergers-and-acquisitions arena, Dutch food and chemicals group DSM agreed to acquire medical device maker Kensey Nash for $360 million. News of the deal drove Kensey Nash shares up 32.1 percent to $38.33.

 

Approximately 6.9 billion shares changed hands on the three major equity exchanges, a number that was far above the daily average of around 6.76 billion shares.

 

Jobless Claims Fall

 

The number of new claims for jobless aid fell by the most in nearly a year last week, easing fears the United States' labor market recovery was stalling. However, the relief was tempered, by other data on Thursday showing services employment declined in April to its lowest level since December, dampening activity in the vast sector. The report indicated U.S. companies are still hiring, though not as fast as they did early in the year. 

 

Recent data has suggested the U.S. economic recovery may have lost some momentum as the second quarter got underway. Those jitters were somewhat offset by data earlier in the week showing the U.S. manufacturing sector picked up pace in April.

 

The mixed labor market indicators precede Friday's much watched payrolls report in which analysts expect to see a rebound in hiring during April.

 

Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 365,000, the Labor Department said on Thursday. It was the biggest weekly fall in claims since early May last year and exceeded expectations for a fall to 380,000.

 

The bigger-than-expected decline in new claims lifted some of the dark cloud cast on Wednesday by data from payroll processor ADP that showed private employers in April created the fewest jobs in seven months.

 

The jobless claims data falls outside the survey week for April payrolls and thus has no direct bearing on the jobs number. However, there is a downside risk to this forecast. Initial claims were elevated for much of April and the ADP survey showed private employers added only 119,000 jobs last month. The drop in the service sector employment gauge also adds to that risk.

 

Consumers also appeared to pull back somewhat in April as several large U.S. retailers, including Target Corp, Macy's and Gap, missed sales estimates.

 

The Institute for Supply Management said its services index fell to 53.5 last month from 56.0 in March, missing economists' forecasts for a modest decline to 55.5. A reading above 50 indicates expansion in the sector, which accounts for about two-thirds of U.S. economic activity. The forward-looking new orders index dropped to 53.5 from 58.8. However, companies saw a build-up in orders and an increase in export orders, suggesting they will need to ramp up production.

 

The ISM data echoed a report from China that showed the services sector there also cooled in April, retreating from a 10-month high hit in March.

 

Most economists have viewed the pull-back in job growth as payback after the weather-induced gains in the previous months. Nonfarm payrolls averaged 246,000 jobs per month between December and February. Federal Reserve Chairman Ben Bernanke said last week the warm winter had probably brought forward some of the hiring by companies, likely artificially boosting payrolls in January and February.

 

Rounding out the picture of the labor market, a separate report from Challenger, Gray & Christmas on Thursday showed planned layoffs by employers rose 7.1 percent last month as cash-strapped state and local governments laid off teachers.

 

A second report from the Labor Department showed nonfarm productivity fell in the first quarter as companies hired more workers to maintain output. Moreover, the moderate rise in wages suggested little pressure on company profits and inflation.

 

Tough Quarter for Most Retailers…except Clothiers

 

Several large retailers, including Target Corp (TGT.N), Macy's Inc (M.N) and Gap Inc (GPS.N), missed sales estimates for April, in sync with broader economic indicators and as cooler weather chilled some of the enthusiasm shoppers had shown earlier this year. An earlier Easter also hurt April sales by shifting demand into March.

 

Of the 20 retailers tracked by Thomson Reuters, nine missed Wall Street estimates of April sales at stores open at least a year. The Thomson Reuters same-store sales index showed a rise of 0.8 percent, short of analysts' estimates for an increase of 1.5 percent. Sales in March had risen 4.3 percent.

 

Clothing retailers, including Gap and Aeropostale, said their earnings in the just-ended fiscal first quarter should come in above analysts' expectations as they were able to rein in discounts and keep inventory under control.

 

TJX, operator of the T.J. Maxx and Marshalls, also raised its profit estimate after doing so in April. Shares of Zumiez, whose 10.1 percent gain topped all other chains, were up 1.02 percent.

 

Many industry experts like to look at March and April sales in combination, to account for the calendar shifts. March results benefited because of an early Easter -- April 8 this year, compared with April 24 in 2011. It was also the warmest March in more than 50 years, which helped spur sales of spring clothing. Combined, March and April same-store sales were up 4.6 percent, excluding drugstores.

 

That increase was "a little bit on the softer side relative to the year-to-date trend, but not dramatically so," he said.

 

For May, the ICSC expects same-store sales to increase 4 percent to 5 percent.

 

Macy's April same-store sales rose 1.2 percent, below the 1.9 percent increase analysts were expecting. The department store chain blamed the earlier Easter and later Mother's Day for the slower growth.

 

Target posted a 1.1 percent rise, missing the analysts' average forecast of 2.8 percent. The discount chain said an increase in the average transaction's value had offset a slight decline in the number of comparable-store transactions.

 

Gap's same-store sales fell 2 percent, which was worse than the 0.8 percent drop analysts were expecting.

 

Still, the company gave a quarterly earnings outlook above Wall Street estimates, as did Aeropostale and American Eagle.

 

Apparel retailers have finally started selling closer to full price after years of discounting. Bines said that while tempered discounting may have hurt Gap's April sales, it helped margins.

 

Victoria's Secret parent Limited Brands, posted a 6 percent rise in same-store sales, beating estimates.

 

One big disappointment came from Costco Wholesale. The company missed Wall Street estimates for the second month in a row, suggesting competition with other big-box retailers hurt the biggest warehouse club operator's performance. Its same-store sales rose 4 percent, while analysts were expecting a 5.1 percent increase.

 

Costco, which competes with Wal-Mart,s Sam's Club and BJ's Wholesale, has been a bit more aggressive in terms of price to drive traffic.