MarketView for May 31

Summary

The major equity indexes fell modestly on Thursday to close out the worst month since September as investor sentiment fell also as a result of Europe's deepening credit problems. The S&P 500 index fell 6.3 percent during May, thereby chalking up its largest percentage decline since September. The 6.2 percent drop by the Dow Jones Industrial Average and Nasdaq's 7.2 percent loss are their largest monthly declines in two years.

Spain was at the center of the latest European developments as the financial markets appeared to conclude that Madrid's government would sooner or later have to ask for outside help for its banks. A report, later denied, of possible plans to assist Spain with its troubled banks helped Wall Street nearly erase losses of 1 percent in the afternoon.

Month-end rebalancing also helped to add some support to the day’s equity prices as money managers did some buying to make up for the declining value of equities during May. However, the continuing worry over Europe and a batch of disappointing economic figures weighed on the market. Jobless claims rose for the seventh week in eight, putting the
Street on edge ahead of Friday's monthly payroll report.

U.S. Steel fell 5.1 percent to $20.30 and Cliffs Natural Resources fell 6.1 percent to $47.78 as energy and materials company shares led declines on the S&P 500. Commodity prices fell in step with the euro at 23-month lows against the U.S. dollar. The greenback weakened sharply versus the yen, a sign that investors were moving money into perceived safe havens.

Private payroll growth accelerated only slightly last month and claims for jobless benefits rose last week, suggesting the labor market recovery was stalling. A disappointing number in Friday's report would further damp market sentiment, but it could also bring back talk of further stimulus by the Fed.

Shares of TJX Cos rose 2.7 percent to $42.46 after the low-price retailer was among those to report sales at stores open at least a year that exceeded Street forecasts. Ciena rose 14.1 percent to $13.55 after the network equipment company posted a surprise second-quarter adjusted profit. Joy Global fell 5.1 percent to $55.86 after the mining equipment maker cut forecasts.

Facebook hit a fresh intraday low of $26.83 before bouncing back to close up 5 percent at $29.60. The social networking company has fallen in six of its nine trading sessions.

In other data, the Commerce Department said first-quarter economic growth in the United States was slightly slower than initially thought and the Institute for Supply Management-Chicago business barometer fell in April to its lowest level since September 2009.

Almost 8 billion shares changed hands on the three major equity exchanges, sharply above the daily average of 6.83 billion so far this year.

Claims for Jobless Benefits Rise

Private payroll growth picked up only slightly in May and claims for jobless benefits rose last week, suggesting the labor market recovery was losing steam after a strong performance early in the year. Meanwhile, factory activity in the Midwest slowed considerably in May and economic growth in the first quarter was a bit softer than initially estimated.

The reports appear to reflect business anxiety amid an uncertain global economic outlook as the euro zone's debt crisis escalates and China's economy slows.

According to ADP, private employers created 133,000 jobs in May. That was only a slight step up from April's tepid increase of 113,000. The report comes ahead of the government's closely watched employment report for May on Friday, which is expected to show nonfarm payrolls increased 150,000, up from a paltry 115,000 in April.

The recent cooling in the labor market has been largely viewed as payback for strong gains during the winter, when unusually warm weather spurred economic activity. But economists are starting to worry that the troubles in Europe and an uncertain fiscal outlook at home are now dampening the U.S. recovery.

Initial claims for state jobless benefits rose 10,000 last week to a seasonally adjusted 383,000, a Labor Department report showed. Claims have now risen in seven of the last eight weeks.

Another report from Challenger, Gray & Christmas, indicated that the number of planned layoffs hit an eight-month high in May as Hewlett-Packard said it would cut about 8 percent of its workforce.

The S&P 500 index ended the month down 6.3 percent, its worst performance since September. The Dow Jones Industrial Average lost 6.2 percent in May and the Nasdaq Composite Index slid 7.2 percent - marking their largest monthly declines in two years.

Prices of Treasury debt rose shaprly on flight-to-safety bids, with the yield on the 10-year note dropping to a record low of 1.53 percent. The dollar was little changed against a basket of currencies.

A report from the Institute for Supply Management-Chicago found factory activity in the Midwest lost steam this month. The group said its business barometer fell to 52.7, the lowest since September 2009, from 56.2 in April. A reading above 50 indicates expansion in the regional economy.

Other regional surveys of factory activity also have found activity slowing, suggesting the manufacturing sector was losing a step nationally. The Institute for Supply Management will release a report on national factory activity for May on Friday.

Separately, the Commerce Department said U.S. gross domestic product increased at a 1.9 percent annual rate in the first quarter, down from the 2.2 percent it had estimated last month. The economy grew at a 3.0 percent rate in the fourth quarter.

Businesses restocked shelves more slowly than previously thought and government spending declined more sharply. There was also a modest downward revision to consumer spending, which accounts for about 70 percent of all economic activity, and stronger import growth.

Business inventories added only 0.21 percentage point to GDP growth compared with a previously estimated 0.59 percentage point. While the small inventory build-up held back growth in the January-March quarter, restocking of shelves, retreating gasoline prices and an improving housing market should provide a boost to output in the second quarter. Growth in the second quarter is currently estimated at a pace of about 2.5 percent.

Retailers on Thursday reported stronger-than-expected sales for May as bargains helped shoppers overcome anxiety about the economy and job market, an encouraging sign for second-quarter GDP growth.

The GDP report also showed that after-tax corporate profits dropped for the first time in three years last quarter. The decline reflected the end of a special tax bonus that allowed U.S. companies to accelerate the depreciation of assets.