MarketView for May 28

Summary

The major equity indexes were higher on Tuesday, with the Dow Jones Industrial Average ending the day at yet another record high after central banks reassured investors that they will keep policies designed to foster global growth.

Consumer confidence was the strongest in May in over five years, while home prices accelerated in March by the most in nearly seven years. The reports were an unequivocal indicator of the economy's resilience despite the pinch of belt-tightening from the government’s Sequester program.

Wall Street is completely immersed in the minutia of monetary policy, with the major equity indexes posting their first negative week last week since mid-April on lingering concerns that the Federal Reserve may scale back its stimulus measures sooner than expected. Those concerns basically became a non-entity after the Bank of Japan and the European Central Bank reaffirmed that their accommodative policies would remain in place, helping indexes recover from last week's decline.

On Monday, when Wall Street was closed for the Memorial Day holiday, ECB Executive Board member Joerg Asmussen said the policy would stay as long as necessary. On Tuesday, BOJ board member Ryuzo Miyao said it was vital to keep long- and short-term interest rates stable.

However, even with that reassurance, speculation persisted that a tapering of the Fed's bond-buying plan could be on the horizon, sending Treasury debt yields to their highest levels in over a year and pulling equities back from their session highs.

Monetary stimulus has contributed to Wall Street's gains this year, with the S&P 500 index up nearly 17 percent. Analysts have also cited earnings growth and relatively cheap valuations as reasons that investors have used any decline as a buying opportunity, helping drive both the Dow and the S&P 500 to a series of record highs.

Cyclical sectors, closely tied to the pace of economic growth, are likely to advance on any sign of continued supportive policies. Bank of America ended the day up 0.8 percent to close at $13.35 while Citigroup gained 2.5 percent to close at $51.79.

Tiffany reported adjusted earnings and sales that exceeded expectations, pushing its share price up 4 percent to $79.22. Tiffany was one of the S&P 500's best performers.

Treasuries yields climbed to their highest levels in over a year.

The price of Omthera Pharmaceuticals nearly doubled to $13.51 after AstraZeneca agreed to acquire the company for $443 million AstraZeneca gained 1.6 percent to end the day at $53.01.

Fannie Mae was among the most actively traded, as its share price increased by 37.4 percent to close at $4.08 with over 131 million shares changing hands.

Volume for the day was modest with about 6.25 billion shares changing hands on the three major equity exchanges, a number that was slightly below the daily average of about 6.4 billion shares.

Home Prices Rise Sharply

Home prices were up 10.9 percent in March compared with a year ago, the most since April 2006. A growing number of buyers are bidding on a tight supply of homes, driving prices higher and helping the housing market recover.

The Standard & Poor's/Case-Shiller home price index released Tuesday, also showed that all 20 cities measured by the report posted year-over-year gains for the third straight month. And prices rose in 15 cities in March from February. That's up from only 11 in the previous month. The monthly figures aren't seasonally adjusted and may reflect the beginning of the spring buying season.

Prices rose in Phoenix by 22.5 percent over the past 12 months, the biggest gain among cities. It was followed by San Francisco (22.2 percent) and Las Vegas (20.6 percent). New York City had the smallest year-over-year increase at 2.6 percent, followed by Cleveland at 4.8 percent.

The index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The March figures are the latest available.

The housing market is steadily recovering, buoyed by solid job gains and near-record low mortgage rates. Sales of new homes rose in April to nearly a five-year high. And sales of previously occupied homes ticked up in April to the highest level in three and a half years.

Despite the gains, a limited number of homeowners are putting their houses on the market. That's helped lift home prices. And it's made builders more willing to ramp up construction. Applications for building permits rose in April to the highest level in nearly five years.

The supply of available homes rose in April, but was still 14 percent below its level a year earlier.

The housing recovery is also creating more construction jobs and bolstering the economy in other ways. Higher home prices make homeowners feel wealthier and encourages them to spend more.

Rising prices also encourage more would-be buyers to purchase homes, before prices rise further. They also enable more homeowners to sell homes, by reducing the number of people who owe more on their mortgages than the homes are worth. Prices have been increasing steadily since last summer. Still, they are about 29 percent below the peak reached in July 2006.

Banks have raised their credit standards since the housing bubble burst and are demanding larger down payments. That's made it particularly hard for potential first-time buyers to obtain a mortgage.

Consumer Confidence Highest in Five years

Consumer confidence strengthened in May to its highest level in more than five years, suggesting consumers' attitudes were resilient in the face of belt-tightening in Washington, a report by the Conference Board indicated on Tuesday.

The Conference Board, an industry group, said its index of consumer attitudes came in at 76.2 from an upwardly revised 69 in April, topping economists' expectations for 71. It was the highest point for that index since February 2008.

April was originally reported as 68.1. After dropping in March, it was the second month in a row confidence has improved. Sentiment had been hit by debates in Washington surrounding fiscal policy, as well as the expiration of the payroll tax holiday at the beginning of the year.

"Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll tax hike and sequester," Lynn Franco, director of economic indicators at The Conference Board, said in a statement.

The expectations index rose to 82.4 from 74.3, while the present situation index climbed to 66.7 from 61.

Consumers' labor market assessment improved. The "jobs hard to get" index slipped to 36.1 percent from 36.9 percent the month before, while the "jobs plentiful" index gained to 10.8 percent from 9.7 percent.