MarketView for May 11

Summary

Bank shares fell on Friday, not an unexpected event after JPMorgan said it lost billions of dollars on bad trades, but the overall market ended only modestly lower, due mostly to gains in technology shares. JPMorgan fell 9.3 percent on record high volume after it disclosed losses on derivative trading. The disclosure by JPMorgan came as shocking news by a bank viewed as a strong risk manager.

JPMorgan estimates the business unit involved will lose $800 million in the current quarter, excluding private equity results and litigation expenses. The bank had previously expected the unit to post a profit of about $200 million. The news sparked fears that the problems could reverberate through the banking sector. As a result, JPMorgan's shares fell to $36.96, and trading volume was around 216.7 million shares.

Meanwhile, Wall Street ended lower for the second week in a row, as additional concerns regarding Europe's fiscal health resurfaced as political turmoil in Greece once again rekindled concerns that it could exit the euro. At the same time, Spain's ailing banks also regurgitated fears the country could need a bailout. Finally, our domestic economic data has not been outstanding.

However, the economic data on Friday indicated that consumer sentiment rose to where it exceeded a four-year high in early May. Add to that the fact that Americans remained upbeat about the job market. The survey was a welcome sign amid worries that the economic recovery may be slowing down.

The Nasdaq finished higher, outperforming the broader market. Shares of Nvidia rose 6.4 percent to $13.21 after quarterly results beat expectations. Nvidia not only aided the Nasdaq but it was also the S&P 500's top percentage gainer. The shares of other chip manufacturers followed suit sending the Philadelphia Semiconductor index up 0.73 percent. Also in the tech sector, shares of Netflix ended the day up 6.8 percent to close at $77.38.

Chesapeake Energy fell 13.9 percent to $14.80 after the company said it may delay assets sales in order to preserve cash flow needed to comply with requirements of its corporate credit facility.

For the week, the Dow fell 1.7 percent, the S&P fell 1.1 percent, and the Nasdaq was down 0.8 percent. The CBOE VIX Volatility Index rose nearly 16 percent for the month in a sign of growing caution.

Thomson Reuters/University of Michigan's preliminary consumer confidence index for May improved to a reading of 77.8 from 76.4 in April, topping forecasts of 76.2.

Of the 453 companies in the S&P 500 that have reported earnings to date for the 2012 first quarter, 66.2 percent have reported earnings above analysts' expectations, according to Thomson Reuters data. That compares with more than 80 percent at the start of earnings season and is below the average for the past 4 quarters of 68 percent.

Shares of Arena Pharmaceuticals closed up 74 percent to $6.36 after a panel of experts recommended approval of the company's obesity pill, a big step toward making it the first new diet drug on the U.S. market in more than a decade. The stock was the most actively traded on the Nasdaq.

Approximately 6.47 billion shares changed hands on the three major equity exchanges. That number was above the daily average of around 6.8 billion shares.

Consumer Sentiment at 4-Year High

Consumer sentiment rose to its highest level in more than four years in early May due to an upbeat outlook regarding the job market. As a result buying plans improved, offering an encouraging sign for the economic recovery.

The Thomson Reuters/University of Michigan's preliminary May reading on the overall index on consumer sentiment improved to 77.8 from 76.4 in April, topping forecasts for a small decline to 76.2. It was the highest level for that index since January 2008.

Despite the recent slowdown in job growth, nearly twice as many consumers reported hearing about new job gains than said they had heard about recent job losses, the survey said. Even so, consumers were only slightly more optimistic about declines in the unemployment rate than they were a year ago, with only one in four expecting it to fall in the year ahead.

In a potential harbinger of increased spending, consumers' buying plans for vehicles and durable goods improved at the beginning of the month, with 65 percent saying buying conditions were favorable, the highest level in more than a year.

After a run-up at the start of the year, gasoline prices have pulled back in recent weeks, providing more breathing room for stretched consumers, and the survey found no further gains in prices were expected in the year ahead.

The consumer sentiment report showed Americans' inflation expectations continued to ease after a run-up in March. The one-year inflation expectation fell to 3.1 percent from 3.2 percent, though the five-to-10-year outlook edged up to 3.0 percent from 2.9 percent.

Producer Prices Fall

Producer prices fell in April as energy costs dropped by the most in six months, a sign of easing inflation pressures that could give the Federal Reserve more room to help the economy should growth weaken.

According to a report released on Friday by the Labor Department, the seasonally adjusted producer price index dropped 0.2 percent last month. That was the first drop of the year and the largest decline since October.

A rise in gasoline prices last year pinched consumers and fueled higher inflation, but the Fed has maintained that the spike would be temporary. Still the annual inflation rate targeted by the Fed continues to hover around the central bank's 2 percent goal, and Friday's price data did not appear to change investor's views on the outlook for monetary policy.

The report on producer prices for April showed wholesale prices 1.9 percent higher in April than a year earlier, the weakest reading since October 2009. The drop in PPI was due to a 1.4 percent decline in energy prices, the largest drop since October. Gasoline costs slumped 1.7 percent while prices also fell for residential natural gas and liquefied petroleum gas.

Wholesale prices excluding volatile food and energy costs rose in line with economist' expectations, up 0.2 percent after March's 0.3 percent gain.

Fueling gains in the core index, wholesale pharmaceuticals prices gained 0.4 percent. Higher prices for civilian aircraft also pushed up core prices.

In the 12 months to April, core producer prices increased 2.7 percent after rising 2.9 percent the previous month. April's reading was the lowest since August.