MarketView for May 16

 

Summary

 

After being in negative territory for most of the day on Friday, a late-day rebound turned everything around as small-cap names rallied after recent weakness and consumer discretionary shares advanced.

 

The Russell 2000 gained 0.6 percent, recovering after once again approaching correction territory, defined as a 10 percent drop from a recent high, earlier in the session. The week has been marked by small-cap weakness, with the Russell index down 0.4 percent for the week. The Dow and the S&P 500 also slipped for the week, while the Nasdaq rose.

 

The S&P 500 climbed back above its 50-day moving average near 1,868, an area that has served as support. Telecom and consumer discretionary sectors led the S&P 500 higher. Shares of Verizon Communications (VZ.N) climbed 2.3 percent to $49.07 a day after a regulatory filing showed Warren Buffett's Berkshire Hathaway bought 11 million shares of Verizon in the first quarter.

 

In earnings news, J.C. Penney and Nordstrom were higher a day after posting earnings that exceeded forecasts. Nordstrom, up 14.7 percent at $70.55, was the S&P 500's biggest percentage gainer. J.C. Penney rose 16.2 percent to $9.73.

 

Positioning before options expiration could have added to the late-day bounce, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles

 

For the week, the Dow fell 0.6 percent, the S&P 500 dipped 0.03 percent and the Nasdaq gained 0.5 percent. Both the Dow and the S&P 500 hit record highs earlier this week. The benchmark S&P 500 is up 1.6 percent for the year. At the same time, the Russell 2000 remained below its 200-day moving average, a sign of weak momentum. Investors have worried that small-caps' prolonged weakness could be a precursor to broader losses.

 

Among other upbeat earnings, shares of Applied Materials (AMAT.O) jumped 8.1 percent to $20.21 a day after the chip gear maker reported revenue that slightly exceeded expectations. Autodesk raised its full-year revenue view, sending its stock up 8.1 percent to $51.67.

 

Economic data added to the positive tone. Housing starts jumping 13.2 percent in April while building permits hit their highest in nearly six years.

 

Approximately 5.7 billion shares changed hands on the major equity exchanges, a number that was below the 6.1 billion share average for the month so far, according to data from BATS Global Markets.

 

Sharp Rise in Housing Starts

 

Housing starts rose sharply during April and building permits hit their highest level in nearly six years, offering hope the troubled housing market could be stabilizing.  According to a report by the Commerce Department released on Friday, groundbreaking for homes increased by 13.2 percent to a seasonally adjusted annual pace of 1.07 million units, the highest since November 2013. The increase, which marked a rebound from a cold winter that had weighed on activity, was driven by starts on multi-family housing.

 

A combination of rising mortgage rates and prices, and slow growing earnings, has pushed homeownership out of the reach of many Americans, helping fuel demand for rental and condo units. Groundbreaking for single-family homes, the largest part of the market, rose 0.8 percent, while starts for the volatile multi-family homes segment surged 39.6 percent.

 

The housing market contracted for a second consecutive quarter in the first three months of 2014, and is expected to add little if anything to growth this year. Federal Reserve Chair Janet Yellen said earlier this month that there was a risk a protracted housing slowdown could undermine the economy.

 

A range of data has shown the economy bouncing back from a deep winter chill. A quarterly survey released by the Philadelphia Federal Reserve Bank on Friday showed forecasters had bumped up their expectations for second-quarter growth to a 3.3 percent annual pace from 3.0 percent previously.

 

But questions remain over how lasting the current strength will prove, and the report on consumer confidence offered a cautionary note. The Thomson Reuters/University of Michigan's consumer sentiment index fell to 81.8 from 84.1 in April.

 

The housing starts report suggested building activity would likely continue to rise for some time as permits to build homes jumped 8.0 percent to a 1.08-million unit pace in April, the highest since June 2008.

 

Permits for single-family homes, however, rose just 0.3 percent and continue to lag groundbreaking, suggesting single-family starts could decline in the months ahead. A survey on Thursday showed confidence among single-family home builders slipped to a one-year low in May.

 

In contrast, permits for multi-family housing soared 19.5 percent. Multi-family permits are running well ahead of starts, which could indicate delays in getting projects started. Permits for buildings with five or more units were the highest since June 2008.

 

Consumer Sentiment Falls

 

The Thomson Reuters/University of Michigan's preliminary May reading on consumer sentiment showed a decline during May as concerns over income growth clouded an otherwise positive economic outlook.

 

The overall index consumer sentiment came in at 81.8, down from 84.1 the month before. It was also below the consensus expectation of 84.5.

 

"The main concern behind the small May loss involved dispiriting trends in wages," survey director Richard Curtin said in a statement, as the median gain in household income for the next year was seen below inflation expectations.

 

However, Curtin said, "consumers judged the current state of the economy at the most favorable levels in ten years."

 

Some 58 percent of consumers reported that the economy had improved, up from 49 percent in April. The May proportion of those indicating improved conditions matched the two readings from 2013 as the highest going back to 2004.

 

The survey's barometer of current economic conditions fell to 95.1 from 98.7 and below a forecast of 99.0.The gauge of consumer expectations slipped to 73.2 from 74.7 and fell short of an expected 75.0. The survey's one-year inflation expectation remained unchanged from last month at 3.2 percent, while the survey's five-to-10-year inflation outlook dipped to 2.8 percent from 2.9 percent.

 

Estimates for Second Quarter Economic Growth Improve

 

Economists raised their forecasts for second quarter economic growth and through the balance of 2014, with a generally brighter outlook for both job growth and lower unemployment.

 

The projection calls for the economy to grow at an annual rate of 3.3 percent in the current quarter, up from a previous estimate of 3.0 percent, according to the Philadelphia Federal Reserve's quarterly survey of 42 forecasters, released on Friday.

 

Third-quarter growth was forecast to accelerate to 2.9 percent, up from a prior forecast of 2.8 percent, and fourth-quarter growth estimates have been raised to 3.2 percent from 2.7 percent.

 

Meanwhile, they see the economy growing at a rate of 2.4 percent for all of 2014, down from the previous estimate of 2.8 percent in the previous survey in February. The downward revision for the annual average pace of growth is a result of the surprisingly weak first-quarter growth rate of just 0.1 percent.

 

Growth in 2015 is expected to come in at 3.1 percent, unchanged from the February survey.

 

The pace of hiring was expected to accelerate in the current quarter compared with previous expectations, with an average rate of monthly non-farm job growth seen around 232,000 versus a previous forecast of 193,500. That is expected to moderate in the third quarter, averaging 204,700, although that is up from a prior forecast of 195,200. Hiring should average 196,500 a month for all of 2014, compared with the prior full-year forecast of 187,700.

 

The jobless rate was expected to be 6.4 percent at the end of the current quarter and 6.3 percent by the end of the third quarter. The most recent official unemployment rate released by the government showed the jobless rate in April dropped to 6.3 percent, the lowest since September 2008.

 

Inflation was expected to remain muted, with year-on-year core consumer price inflation, which strips out food and energy costs, averaging 1.8 percent in both the second and third quarters, compared with previous estimates of 1.8 percent for the second quarter and 1.9 percent for the third.

 

Looking at the inflation measure most closely tracked by the U.S. Federal Reserve, the core personal consumption expenditures, or PCE, index, forecasters also see muted price pressures. The second-quarter rate was seen at 1.5 percent, unchanged from the prior estimate. The third-quarter rate was also forecast to pick up to 1.7 percent, up from 1.6 percent in the February survey.