MarketView for May 30

Summary

The Dow Jones Industrial Average and the S&P 500 indexes hit record closing highs on Friday, wrapping up four straight months of gains, after mixed economic data gave investors little reason to rush into stocks.

After the benchmark S&P 500's latest record closing high - its fourth in the last five sessions - gains may be harder to come by until the market's direction becomes clearer. Payrolls data and a European Central Bank meeting will be the major catalysts next week.

Consumer spending fell for the first time in a year in April, but the decline probably will not change expectations for a rebound in growth this quarter. An inflation gauge rose at its quickest pace since November 2012 while business activity in the Midwest rose in May at its strongest pace since October 2013.

Equity investors kept an eye on Treasury yields. The 10-year note's yield rose after the strong Chicago PMI data, but remained below 2.5 percent, near an 11-month low hit during Thursday's session. The low yields helped to bolster dividend-paying stocks.

Friday's gain lifted the Dow above its previous record close of 16,715.44 set on May 13. For the week, the Dow was up 0.7 percent, the S&P 500 chalked up a 1.2 percent gain, and the Nasdaq was up 1.4 percent.

The Dow gained 0.8 percent for May and the S&P 500 rose 2.1 percent, marking the fourth straight month of gains for both indexes. The Nasdaq, up 3.1 percent, scored its first monthly gain in the past three months.

Big Lots rose 13.1 percent to end the day at $42.44 after the closeout retailer posted better-than-expected results and higher sales.

In contrast, shares of apparel retailers Express and Guess fell a day after the companies forecast disappointing profits for the current quarter amid a sluggish revival in consumer spending. Express shares ended the day down 7.5 percent to $12.61, while Guess fell 5.1 percent to close at $25.50.

Volume was modest, with about 5.92 billion shares changing hands on the major equity exchanges, a number that was slightly above the 5.75 billion share average for the month, according to data from BATS Global Markets.

Lower Consumer Spending but a Tad Bit Higher Inflation

The Commerce Department reported on Friday that consumer spending fell 0.1 percent, the first decline since April 2013, coming on the heels of two months of solid gains. However, the decline is expected to be temporary given the strengthening of jobs market. Nonetheless, the decline followed an upwardly revised 1.0 percent jump in March that was the largest gain since August 2009.

April's drop, which was driven by weak spending on durable goods and utilities, did not change expectations economic growth would top a 3 percent annual pace this quarter after output shrank in the first three months of the year.

A separate report showed consumer sentiment slipped in May as households worried about income, but that too was viewed as temporary in light of the steady labor market improvement. The Thomson Reuters/University of Michigan's consumer sentiment index fell to 81.9 in May from 84.1 in April, but was up slightly from earlier in the month.

Another report from the Institute for Supply Management-Chicago indicated that factory output in the Midwest reached its highest level in seven months during May. Order backlogs rose to a three-year high and inventories rose for a second consecutive month.

The report on consumer spending provided the latest evidence that inflation was starting to stir. Prices rose 0.2 percent in April, pushing the year-on-year reading up to 1.6 percent - the largest gain since November 2012. It had advanced 1.1 percent in March.

Excluding food and energy, prices increased 0.2 percent. These so-called core prices were up 1.4 percent from a year ago, the biggest increase since March 2013. Nonetheless, the pick-up is welcome news for Federal Reserve officials, who have been worried that inflation was running so far below the central bank's 2 percent target.

Weak medical care costs have kept inflation down but that anchor is slipping away. The rise in medical care costs plus increasing rents should lift inflation this year.