MarketView for May 29

Summary

The S&P 500 index climbed to its third record closing high in four sessions on Thursday as traders shrugged off data that showed the economy shrank in the first quarter and bet on improvement in the second quarter. The S&P 500 gained 10.25 points or 0.54 percent, to 1,920.03 - a record close and a lifetime intraday high. The Dow Jones Transportation Average also hit another record high, ending the day up 0.4 percent at 8,110.35.

New claims for unemployment benefits came in lower than expected last week, pointing to a strengthening labor market and giving investors a reason to buy stocks. Data from the Commerce Department showed that gross domestic product contracted for the first time in three years in the first quarter, although signs indicated it has rebounded.

Citi analysts said the economy could grow nearly 4 percent in the second quarter, while Goldman Sachs raised its estimate to 3.9 percent.

The U.S. 10-year Treasury note yield touched 2.40 percent, its lowest level since last June, on expectations of further policy easing by the European Central Bank next week. Low yields could keep pulling investors into dividend-paying stocks, with high-yielding utilities widely outperforming the S&P 500 so far this year.

Hillshire Brands rose 17.7 percent to $52.76 after Tyson Foods offered to top a bid from Pilgrim's Pride. Tyson shares rose 6.1 percent to $43.25. Pilgrim's Pride fell 1.1 percent to $25.09. 

Apple gained 1.8 percent to close at $635.38 after hitting $636.87, its highest level in a year and a half, a day after the iPhone maker announced it will buy music streaming and audio equipment company Beats for about $3 billion.

Volume was light, with about 4.88 billion shares changing hands on the major equity exchanges, a number that was well below the 5.78 billion share average so far this month, according to data from BATS Global Markets.

Economy Contracts

Gross domestic product contracted for the first time in three years in the first quarter as it buckled under a severe winter, but there are signs it has rebounded and could expand by as much as 4 percent in the current quarter. According to a report by the Commerce Department on Thursday morning, GDP decreased at a 1.0 percent annual rate.

This was the worst performance for our economy since the first quarter of 2011 and reflected a far slower pace of inventory accumulation and a larger than expected trade deficit. However, these weather-related temporary factors should fade. Inventories, in particular, are expected to swing higher, boosting output in the April-June quarter.

GDP was initially estimated to have grown at a 0.1 percent rate. It is not unusual for the government to make sharp revisions to GDP numbers as it does not have complete data when it makes its initial estimates.

A drop in business spending on commercial property and plant was also a drag. It is estimated that severe weather could have reduced GDP growth by as much as 1.5 percentage points. The economy grew at a 2.6 percent pace in the fourth quarter.

Contracts to buy previously owned homes rose in April for a second month, a positive sign for the troubled housing market. The reports added to data on manufacturing and hiring that have buoyed hopes of strong bounce back in growth.

Businesses accumulated $49.0 billion worth of inventories in the first three months of the year, far less than the $87.4 billion estimated last month. It was the smallest amount in a year and left inventories subtracting 1.62 percentage points from first-quarter growth.

While the decline in exports was not as severe as initially thought, import growth was stronger, resulting in a trade deficit that sliced off 0.95 percentage point from GDP growth.

A measure of domestic demand that strips out exports and inventories expanded at a 1.6 percent rate, rather than a 1.5 percent rate, indicating underlying strength in the economy.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.1 percent rate. It was revised from a 3.0 percent pace and was helped by the Affordable Healthcare Act, which expanded coverage to many Americans.

Business spending on nonresidential structures, such as gas drilling, contracted at a 7.5 percent rate. It previously had been estimated to have increased at a 0.2 percent pace.

While corporate profits recorded their largest decline in more than five years, that reflected the expiration of a depreciation bonus rather than fundamental weakening at the corporate level.

Pending Home Sales Stabilizing

Contracts to buy previously owned homes were up modestly during April, a sign of stabilization in the housing market, which has been pummeled by higher interest rates and a harsh winter.

The National Association of Realtors said on Thursday its Pending Home Sales Index, based on contracts signed last month, increased 0.4 percent to 97.8. The increase was below the expected 1.0 percent rise.

Sales fell last summer after the Fed indicated it would soon reduce economic stimulus efforts, pushing mortgage rates sharply higher. Rates have eased this year, but for many homebuyers they remain about seven tenths of a percentage point higher than they were in May of 2013.

Sales have now risen for two consecutive months. However, they fell 9.2 percent in the 12 months through April.

Contracts increased in the Northeast and the Midwest, but fell in the South and the West.

Jobless Claims Decline – Lowest Since 2007

The Labor Department reported on Thursday that the number of new claims for unemployment benefits fell more than expected last week, pointing to a strengthening labor market. Initial claims for state unemployment benefits declined 27,000 to a seasonally adjusted 300,000 for the week ended May 24. The prior week's claims were revised to show 1,000 more applications received than previously reported.

The four-week moving average for new claims, considered a better measure of underlying labor market conditions as it irons out week-to-week volatility, fell 11,250 to 311,500 last week, the lowest level since August 2007. That covered the household survey week, from which the unemployment rate will be calculated. A Labor Department analyst said there were no special factors influencing the state level data.

Claims have been volatile in recent weeks, reflecting difficulties seasonally adjusting the data around moving holidays such as Easter and Passover. Through the volatility, however, claims continued to suggest the labor market was firming.

The claims report showed the number of people still receiving benefits after an initial week of aid fell 17,000 to 2.63 million in the week ended May 17, the lowest level since November 2007.

The unemployment rate of people receiving jobless benefits was unchanged at 2 percent. That and a 43,000 decline in the so-called continuing claims between the April and May survey periods suggest the unemployment rate could decline from 6.3 percent in April.