MarketView for May 31

Summary

Stocks sold off in late trading to close sharply lower on Friday, with the S&P 500 index posting consecutive weekly losses for the first time since November. Some of the decline was attributable to global index rebalancing and reallocation of investments to bonds from stocks, but a desire to protect profits also contributed to the exodus late in the session.

Nonetheless, the S&P 500 ended the month up 2.1 percent, its seventh straight month of gains and its longest streak of monthly gains since 2009. And it is up 14.3 percent in 2013 after repeatedly scaling record highs, scoring its best five-month start to the year since 1997. Over the past seven months, the S&P 500 has climbed 15.5 percent.

For the week, the Dow fell 1.2 percent, the S&P 500 lost 1.1 percent and the Nasdaq dipped 0.1 percent. For the month of May, the Dow rose 1.9 percent and the Nasdaq gained 3.8 percent.

Trading has been volatile for most of the week on concerns that the Fed may ease its monetary policy, the main engine behind the strong rally in equities this year.

Data on Friday gave mixed signals on the economy and failed to quell speculation about possible actions by the Fed to trim its stimulus measures. Manufacturing was up more than expected in May and reflected expansion of business activity after contraction in April. At the same time, consumer spending fell in April for the first time in almost a year and inflation pressures were subdued.

Selling accelerated near the market's close with the rebalancing of the MSCI indexes at the end of the day. Credit Suisse forecast $19 billion in total trading as a result of the rebalancing, with $15 billion related to developed markets. According to Credit Suisse, stocks were expected to see the greatest amount of net selling at the close as a result of the MSCI rebalancing, with a net outflow of about $300 million from indexes.

Energy and healthcare stocks were among the session's worst performers, with Pfizer and Exxon Mobil the two biggest drags on the S&P 500. Pfizer lost 3.6 percent to $27.23, while Exxon Mobil was down 1.8 percent to close at $90.47.

The Thomson Reuters/University of Michigan final reading on consumer sentiment for May was 84.5 - the highest level since July 2007 - and above expectations for a reading of 83.7.

Volume was heavy due to the MSCI rebalancing, with about 7.64 billion shares changing hands on the three major equity exchanges, a number that was well above the daily average of 6.37 billion shares.

Consumer Spending Down

Consumer spending fell in April for the first time in almost a year, while at the same time inflation pressures were subdued. The declines were a strong indication of a possible slowdown in economic activity. That in turn should allow the Federal Reserve to maintain its monetary stimulus for the near to medium term future.

According to a report released by the Commerce Department before the markets opened, consumer spending fell 0.2 percent, making it the weakest reading since May of last year. Spending was up 0.1 percent in March.

Accounting for about 70 percent of GDP, consumer spending was held back by weak demand for utilities and a drop in receipts at gasoline pumps. However, when adjusted for inflation, spending nudged up 0.1 percent last month after rising 0.2 percent.

It was the sixth straight month of gains in the so-called real consumer spending, That modest rise suggested that consumer spending would slow in the second quarter after accelerating at a 3.4 percent annual pace in the first three months of the year.

Lack of income growth as job gains remain moderate is weighing on domestic demand. Last month, income was flat and the saving rate was unchanged at 2.5 percent. The weak demand tone was underscored by very benign inflation pressures in April. A price index for consumer spending fell 0.3 percent last month after dipping 0.1 percent in March. A core reading that strips out food and energy costs was flat after rising 0.1 percent the prior month.

Over the past 12 months, inflation has risen just 0.7 percent, the smallest gain since October 2009 and pushing further below the Federal Reserve's 2 percent target. The index had increased 1.0 percent in the period through March. Core prices were up 1.1 percent, the smallest rise since March 2011 and slowing from 1.2 percent in March.

The weak spending and the lack of inflation pressures should dampen market speculation that the Fed might start scaling back monetary easing later this year.

Consumer Sentiment Up Sharply

Greater optimism over the economic outlook and personal finances in the midst of record stock market prices pushed U.S. consumer sentiment to its highest level in nearly six years in May, a survey released on Friday showed. While upper income households continued to set the pace, confidence also began to improve among middle and lower income households in the latter part of the month. Wealthier households are more likely to be invested in equities and reap the benefits of this year's sharp stock market rally.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment rose to 84.5 from 76.4 in April. It was the highest level since July 2007. The report topped expectations for 83.7, which was May's preliminary figure earlier in the month.

The barometer of current economic conditions jumped to its highest level since August 2007 at 98.0 from 89.9, while the gauge of consumer expectations climbed to 75.8 from 67.8.

The index of buying conditions for durable goods rose to 147 from 137.

Rising stock market and home prices prompted more consumers to report that their finances had recently improved rather than worsened for the first time in five years, the survey said. As well, 58 percent said the economy had improved.

The survey's one-year inflation expectation was unchanged at 3.1 percent, while the survey's five-to-10-year inflation outlook also held steady at 2.9 percent.