MarketView for May 13

Summary

It was an uneventful day on Wall Street on Monday, as the major equity indexes for the most part were relatively unchanged; pausing after hitting record highs last week, but strength in healthcare issues helped to keep declines in check. The S&P 500 healthcare sector climbed 0.7 percent and was the day's best performer.

Other large healthcare group gainers included Pfizer, up 2.3 percent at $29.37; Gilead up 3.1 percent at $54.47; and Biogen Idec up 4.5 percent at $222.74.

The day’s uneventful trading followed a third straight week of gains on the major indexes, with both the Dow Jones Industrial Average and S&P 500 index setting record closing highs last week. The S&P 500 remains up 14.5 percent for the year so far.

While some analysts argue the long-term trend is still higher, many see momentum waning in the near term in the absence of positive catalysts. Volume has been lighter than average, and volatility has been low in recent days.

Shares of Theravance ended the day up 17.9 percent to $41.20 after Irish pharmaceutical manufacturer Elan agreed to a $1 billion deal to buy 21 percent of the royalties that Theravance receives from GlaxoSmithKline for its respiratory drugs.

Perion Network ended the day up 10.6 percent to $13.94 after the Israeli consumer Internet company posted first-quarter earnings.

The CBOE Volatility index ended the day down 0.3 percent.

Among the day’s declining issues, Yum Brands fell 2 percent to $68.92. After the market closed on Friday, the fast food chain operator posted a steep decline in Chinese sales during the month of April.

Helping to limit the market's decline, retail sales rose 0.1 percent in April, better than the 0.3 percent drop that had been expected and returning to growth following a decline in March. Excluding autos, gasoline and building materials, core sales rose 0.5 percent. Retail sales account for about 30 percent of all consumer spending.

Business inventories were unchanged in March for a second straight month, versus expectations of a 0.3 percent rise, suggesting restocking could help second-quarter economic growth.

Earnings have been mostly better than expected. With 90 percent of the S&P 500 having reported, 67.2 percent of companies have topped earnings expectations, according to Thomson Reuters data, even with the average over the past four quarters. Only 46.9 percent have beaten revenue expectations, below the 52 percent average over the past four quarters.

Approximately 5.3 billion shares changed hands on the three major equity exchanges, a number that was well below the average daily closing volume of about 6.4 billion shares so far this year.

Retail Sales Up Unexpectedly

Retail sales unexpectedly rose in April, pointing to underlying strength in the economy and leading to a rise second-quarter growth estimates. The surprise gain in retail sales, which account for about 30 percent of consumer spending, was the latest sign of resilience in an economy that has been hit by belt-tightening in Washington as the government tries to cut its budget deficit.

According to a report released by the Commerce Department on Monday morning, retail sales were up 0.1 percent after a 0.5 percent drop in March as households bought automobiles, building materials and a range of other goods.

So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of the government's measure of gross domestic product, increased 0.5 percent after an upwardly revised 0.1 percent gain in March. February's core sales were revised higher as well.

Coming on the heels of data showing relatively sturdy job growth over the last three months, the increase in core sales helped to allay fears of an abrupt slowdown in the economy.

Several economists raised second-quarter growth estimates on the fairly strong core sales number. Goldman Sachs lifted its forecast by three tenths of a percentage point to a 2.1 percent annual rate, while JPMorgan pushed up its estimate by half a point to 2 percent.

The positive revisions to the core sales data for February and March initially led economists to anticipate that the government would revise higher its initial 2.5 percent estimate for first-quarter GDP growth.

However, a second report from the Commerce Department showed business inventories were flat in March for a second month, suggesting restocking was probably not as big a boost to growth in the first three months of the year as initially thought. Even so, the government's initial estimate would likely hold, given that core retail sales for February and March were stronger than earlier believed.

In addition, the lack of inventory accumulation should be a boon to second-quarter growth as businesses will likely have to stock up to meet steady demand from households.

Growth is being crimped by the end of a 2 percent payroll tax cut and higher tax rates for wealthy Americans, which kicked in on January 1. Across-the-board government spending cuts worth about $85 billion are also weighing. However, declining gasoline prices, which fell 14 cents in April, are helping to offset some of the drag on household income, freeing up money for discretionary spending.

The tone of the retail sales report was mostly firm. Receipts at auto dealerships rose 1.0 percent after falling 0.6 percent in March. Though falling gasoline prices pushed down receipts at gasoline stations, sales excluding gasoline recorded their largest increase since December. Stripping out gasoline and autos, sales rose 0.6 percent.

Sales of building materials and garden equipment supplies posted their largest increase since September, a reflection of the housing market's recovery.

Receipts at clothing stores recorded their largest increase since February last year. There were also increases in sales at sporting goods, hobby, book and music stores, and electronics and appliances stores. Consumers also spent more at restaurants and bars. Yet, furniture store sales were flat and receipts at grocery stores were down.