MarketView for October 16

Summary

Stocks rallied on Tuesday, giving the S&P 500 its best two-day advance in a month as strong earnings from Johnson & Johnson and other bellwether companies raised hopes for the rest of the reporting season. Johnson & Johnson also increased its full-year profit outlook. Its shares ended the day up 1.4 percent to close at $69.55, helping the Dow Jones industrial average register its best day since September 13, when the Federal Reserve unveiled its third round of stimulus, or quantitative easing, known as "QE3."

Goldman Sachs also beat expectations, its revenue more than doubled and it raised its quarterly dividend. But it earned less money from customers' trading, and the shares ended the day down 1 percent to close at $123.22.

Shares of Citigroup rose 1.6 percent to $37.25 on Tuesday after the surprising resignation of Chief Executive Officer Vikram Pandit..

The reports were among a flood of results from 80 S&P 500 companies as the third-quarter earnings season picks up the pace. A spate of corporate warnings heading into the period raised worries that slower growth in Europe and China may be affecting corporate America more than previously thought.

Overall S&P 500 companies' quarterly earnings are still are expected to decline 2.3 percent from a year ago, but the forecast does mark a slight improvement from estimates last week, according to Thomson Reuters data.

The S&P 500 has gained 1.8 percent in the last two days, rebounding from last week's slide of 2.2 percent. That was the benchmark index's worst week in four months. After the bell, shares of IBM fell 3.3 percent to $204.10 following the release of its results. IBM had ended the regular trading session at $211, up 1 percent.

Shares of Intel also fell after the bell, falling 1.5 percent to $22.02 after the world's largest chipmaker forecast gross margins for the current quarter below expectations.

During the regular session, Coca-Cola fell 0.6 percent to $37.90 after it reported a rise in earnings. However, quarterly revenue was short of Street expectations, hurt by declines in Europe and Asia.

UnitedHealth reported higher than expected quarterly earnings but its guidance going forward was for a cautious outlook. As a result, its shares fell 1.1 percent to $56.88.

Economic data indicated that the headline Consumer Price Index rose 0.6 percent in September as the cost of gasoline surged, posing a threat to consumers' spending power. On the other hand, inflation pressures looked unlikely to derail the Fed's ultra-easy policy path. Excluding volatile food and energy prices, core CPI was up 0.1 percent, a gain that was less than the forecast of 0.2 percent.

About 6.2 billion shares changed hands on the major equity exchanges, a number that was somewhat less than the year-to-date average daily closing volume of 6.51 billion shares.

Industrial Output Rises

Industrial output rose by more than expected in September, posting a sharp rebound from a downwardly revised drop the previous month, which had been held back because of hurricane impact on oil and gas production in the Gulf of Mexico.

Industrial production rose by 0.4 percent, the Federal Reserve said on Tuesday. Industrial production encompasses output from factories, utilities and mining operations, including oil and natural gas production.

Manufacturing output rose by 0.2 percent, utilities output was up 1.5 percent and mining output advanced 0.9 percent in September.

Capacity utilization, a measure of how fully firms are using their resources, was at 78.3 percent in September, matching forecasts, and was slightly higher than the 78.0 percent rate in August. This was previously estimated at 78.2 percent.

Homebuilder Confidence Remains High

Confidence among homebuilders remains at its highest level in six years, reflecting improved optimism over the strengthening housing market this year and a pickup in visits by prospective buyers to builders' communities.

The National Association of Home Builders/Wells Fargo builder sentiment index released Tuesday rose to 41 this month, up from 40 in September. That's the highest reading since June 2006, just before the housing bubble burst.

Any reading below 50 indicates negative sentiment about the housing market. The index hasn't been above 50 since April 2006, the peak of the housing boom. The gauge of current sales and builders' outlook on sales over the next six months remained unchanged from September's reading. But a measure of traffic by prospective buyers rose 5 points to 35, the highest level since April 2006.

The survey is based on responses from 400 builders. It has been trending higher since last October, when the reading stood at 17. The index sank to 8, its lowest point dating back to 1985, in January 2008. Recent housing data continue to point to signs that the housing market is making a sustained comeback.

Sales of new homes remained near a two-year high in August. And home prices rose nationwide in July compared with a year earlier, according to the Standard & Poor's/Case-Shiller index. That was the second straight year-over-year gain. Construction of single-family homes rose in August to the fastest annual rate in more than two years.

Home sales have benefitted from ultra-low mortgage rates. A limited supply of homes for sale also has helped drive prices up. Yet, despite the positive strides, sales of new homes and the pace of new construction remain well short of levels considered healthy. And while many economists anticipate the turnaround will continue gaining momentum next year, the housing market isn't expected to recover fully until job growth improves and the unemployment rate, now at 7.8 percent, declines further.

Though new homes represent less than 20 percent of the housing sales market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to the NAHB's data.

Core Inflation Remains Low

The Labor Department said a surge in the cost of gasoline pushed the country's Consumer Price Index up 0.6 percent in September. Higher costs at the pump force many American consumers to cut back on other spending, although retail sales data for September released on Monday pointed to a pick-up in consumer spending despite higher fuel costs.

Crude oil and gasoline prices rose over the summer due in part to the increased pressure being applied to Iran over its nuclear program. Prices for gasoline have comes down slightly in recent weeks, which could ease pressure on consumers this month.

The inflation report also showed that prices outside food and energy - seen as a barometer of inflation trends - rose only 0.1 percent in September for the third straight month.

In the 12 months to September, overall consumer prices increased 2 percent, the fastest pace since April and up from 1.7 percent in August. Core prices also rose 2 percent in the year through September, up a tenth of a point from August's reading.

While most economists don't see inflation threatening the economy, some believe the Fed would tolerate prices rising faster than the central bank's 2 percent target over the shorter term to allow stronger economic growth as the country recovers from the 2007-09 recession.

Allowing this view to blossom, the Fed said in September it would keep interest rates low for a long time even after the economy strengthens. Meanwhile, weekly earnings for workers were flat in September when adjusting for inflation.