MarketView for May 16

Summary 

The major equity indexes were lower again on Wednesday with the S&P 500 chalking up its fourth straight decline as the Street continues to worry about Greece's future as a member of the euro zone. The day’s early gains were erased after the European Central Bank said it had stopped providing liquidity to some Greek banks that had not been recapitalized. The ECB's move caused some market confusion, adding to volatility as traders have a quick trigger finger when it comes to news about Greece.

Worries about Greece's political and financial future, along with political upheaval in the broader euro zone, have driven equity losses in recent weeks, sending the benchmark S&P index down 5.9 percent since the end of March. German Chancellor Angela Merkel attempted to assuage investor fears on Tuesday by saying Greece will stay in the euro zone. Merkel's comments helped stem selling prior to the market open.

Opinion polls in Greece show leftists who are opposed to the terms of the international bailout for the country would likely win a new election, set for June 17. Greeks, afraid of the devaluation that would follow an exit from the euro, withdrew at least 700 million euros from local banks on Monday.

Wall Street was also not bubbling over with joy as a result of the minutes from the Fed's most recent meeting in which policymakers kept alive the possibility of a fresh round of monetary stimulus for the moderately expanding economy.

J.C. Penney watched as its share price fell 19.7 percent to close at $26.75, the largest one-day percentage drop for that stock since at least 1973. The decline came a day after the retailer announced that it was cancelling its dividend. Penney's financial results showed the effort to remake itself as an affordable fashion-oriented retail chain took a much bigger-than-expected toll on sales in the first quarter.

Output rose in April at its fastest pace in over a year, the Federal Reserve said. A separate report showed a rebound in groundbreaking for homes in April, suggesting the housing market recovery was gaining. Domestic data continues to show a modest expansion, leading some analysts to believe the market could be primed for a strong rally if a solution in Greece is reached.

General Electric gained 3.3 percent to $19 on news its finance arms won regulatory approval to resume returning some of its profit to the parent company. Such a move could clear the way for GE to accelerate stock buybacks and raise its shareholder dividend. GE Capital plans to pay a special $4.5 billion dividend to GE later this year.

Target edged up 0.4 percent to $55.32 after the discount retailer raised its full-year profit view.

Facebook increased the size of its initial public offering by 25 percent and could raise as much as $16 billion as strong investor demand trumps the issue of whether  the company's long-term potential to make money realizable.

Volume was active with about 7.59 billion shares changing hands on the three major equity exchanges, a number that was well above the daily average of 6.79 billion shares.

Economic Data Continues to Show Positive Growth

Groundbreaking for homes rebounded in April and factory activity gained momentum, suggesting a moderate pickup in economic growth early in the second quarter. The reports on Wednesday were the latest in a series to dampen fears that the economic recovery was stagnating after tepid job growth last month.

According to a report by the Commerce Department, housing starts increased 2.6 percent to a seasonally adjusted annual rate of 717,000 units.

In a separate report, the Federal Reserve said production at the nation's mines, factories and utilities rose 1.1 percent - the largest gain since December 2010.

The reports came on the heels of data on Tuesday showing a strong rebound in factory activity in New York state and confidence among home builders hit a five-year high this month. Retail sales in April also showed underlying strength.

The Street’s consensus is now that the economy is expected to grow at a 2.5 percent annual pace in the second quarter, although the government's 2.2 percent initial estimate for first-quarter growth is expected to be lowered to below 2 percent later this month.

Minutes of the Federal Reserve's April 24-25 meeting said several policymakers felt additional monetary easing by the Fed could be necessary if the recovery lost momentum or downside risks increased.

The jump in industrial production last month was driven by a 4.5 percent increase in utility output, a 1.6 percent gain in mining and a 0.6 percent rise in factory production. Manufacturing has been one of the main pillars of the recovery from the 2007-09 recession and continues to show resilience even with Europe, a top destination for U.S. exports, teetering on the edge of recession.

The signs of life in the U.S. housing market were bolstered by upward revisions to housing starts and permits for March. Still, the number of new projects builders broke ground on in April was more than two-thirds below the peak reached in January 2006.Housing starts last month rose across the board. Groundbreaking for single-family homes, the largest portion of the market, increased 2.3 percent. Starts for multi-family buildings advanced 3.2 percent.

According to a report by the Mortgage Bankers Association, residential construction in the first quarter grew at the fastest pace in nearly two years and is expected to contribute to economic growth this year for the first time since 2005. Other data also pointed to recovery in the housing market. The delinquency rate on home mortgages fell in the first quarter to the lowest level since 2008, though the share of homes in the foreclosure process inched higher

An oversupply of unsold homes is the main challenge for the market, but there is anecdotal evidence that supply is gradually being whittled down. That and rising demand for rentals, which is keeping builders busy, should help housing find its footing.

A rise in sentiment among home builders to a five-year high in May, according to a survey released on Tuesday, suggests the 7 percent drop in permits to a 715,000-unit pace last month would be temporary. Two strong back-to-back monthly gains had taken permits in March to their highest level since September 2008. Permits to build single-family homes rose 1.9 percent in April to a 475,000-unit pace, but permits for multi-family homes fell 20.8 percent to a 240,000-unit rate.