MarketView for May 1

Summary

Share prices were down sharply on Wednesday as the latest economic data continued t indicated rather anemic growth, while bellwether companies disappointed on revenue. Equities briefly pared their losses after the Federal Reserve said it would continue its policies of stimulating the economy. However the mild rally was unable to hold its ground and the decline resumed. About 70 percent of stocks traded on the New York Stock Exchange closed lower while three-fourths of Nasdaq-listed shares ended in negative territory.

Equities have performed well of late, with the S&P 500 hitting both intraday and closing record highs on Tuesday, though a trend of discouraging data indicated that the Fed wouldn't ease up on its accommodative monetary policy of quantitative easing.

The private-sector employers added 119,000 jobs in April, well below economists' expectations, according to a report from payrolls processor ADP. A separate report from the Institute for Supply Management showed the manufacturing sector expanded only modestly in April.

Adding to concerns, growth in China's factory sector unexpectedly slowed last month as new export orders fell, raising fresh doubts about the world's second-largest economy after a disappointing first quarter.

Materials and energy stocks led declines as expectations of slower growth pushed basic materials prices lower. Exxon Mobil fell 1.7 percent to $87.51, while shares of Rio Tinto were down 2.7 percent to close at $44.82.

The S&P 500 has recently ended sessions much stronger than its early lows as traders bought equities on signs of weakness. The S&P 500 is up 11 percent so far this year. April marked the index's sixth consecutive month of gains.

Disappointing corporate results also weighed on the market. Both MasterCard and Merck posted revenue that fell short of expectations, continuing a trend of prominent companies struggling to increase sales.

MasterCard ended the day down 2.4 percent to close at $539.82. Merck was down 2.8 percent to close at $45.69. Visa fell 1.5 percent, ending the day at t to $166.02.

Facebook rose 2.1 percent to $28 in after-hours trading after the company reported first-quarter revenue that exceeded expectations. In regular trading, Facebook fell 1.2 percent to close at $27.43.

Of the 342 companies in the S&P 500 that have reported earnings so far this season, 68.7 percent have beaten expectations and 43.2 percent have reported revenue above forecasts. Over the past four quarters, 67 percent have beaten earnings forecasts and 52 percent have beaten revenue expectations.

T-Mobile rose 6 percent to $16.52 in its debut on the New York Stock Exchange. The company was created by the merger of MetroPCS Communications and Deutsche Telekom AG's U.S. unit T-Mobile USA.

About 6.53 billion shares changed hands on the three major equity exchanges, a number that was above the daily average so far this year of about 6.36 billion shares.

Fed Could Alter Policy at Will

The Federal Reserve on Wednesday stood by its extraordinary efforts to stimulate the economy because unemployment remains high at 7.6 percent. The Fed said the economy and job market have been improving only moderately, held back by government spending cuts and tax increases. The Fed said recent budget tightening in Washington could be a risk to growth, even as it noted some improvement in the labor market.

After a two-day policy meeting, the Fed maintained its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it said that it will continue to buy $85 billion a month in Treasury bonds and mortgage-backed securities. The bond purchases are intended to keep long-term borrowing costs down and encourage more borrowing and spending.

In a statement, the Fed made clear that it could increase or decrease its bond purchases depending on the performance of the job market and inflation. And it was explicit for the first time that tax increases and federal budget cuts are "restraining economic growth."

The Fed action was support on an 11-1 vote. Esther George, president of the Kansas City Federal Reserve Bank, dissented for the third straight meeting. The statement said that George remained concern that the continued high level of policy accommodation increased the risks of future economic and financial imbalances.

The consensus of opinion now is that the Fed will keep the Fed's easy-credit policies unchanged, possibly for the rest of the year. The Fed has been joined by other major central banks in seeking to strengthen growth and reduce high unemployment.

The European Central Bank could cut its benchmark lending rate from a record low of 0.75 as soon as Thursday because the euro area's economy remains stagnant. Unemployment for the Eurozone is 12.1 percent. And the ECB predicts that the euro economy will shrink 0.5 percent in 2013.

Japan's central bank has acted to flood its financial system with more money to try to raise consumer prices, encourage borrowing and help pull the world's third-largest economy out of a prolonged slump. Economists say Japanese consumers will spend more if they know prices are going to rise. The Bank of Japan has kept its benchmark rate between 0 and 0.1 percent to try to stimulate borrowing and spending.

The Fed's goal is to keep price changes from hurting the economy. This could occur if inflation got out of control or if deflation, a prolonged decline in wages, prices and the value of assets like stocks and houses. The United States last suffered serious deflation during the Great Depression of the 1930s but Fed policymakers worry more about the threat of deflation any time prices go lower than 2 percent.

Record Quarterly Earnings

First-quarter earnings for the S&P 500 currently stand at $26.44, according to S&P Capital IQ, the highest ever for a single quarter, beating the prior record of $26.36 for the fourth quarter of 2012.

How is it possible, when it appears so many companies are missing and there is such poor top-line growth? About 70 percent of companies are exceeding estimates. Especially strong have been health care (72 percent exceeded), financials (75 percent), and even technology, where 70 percent have exceeded the Street’s estimates. Those are the three largest sectors in the S&P 500.

Moreover, companies are not just exceeding expectations; they are doing so on average by 5.7 percent, which is the historical norm. Meanwhile, projections are for earnings growth of 7 percent this year. The market seems to be happy with anything around 5 percent earnings growth.