MarketView for October 17

Summary

The S&P 500 index was higher at the closing bell for the third consecutive day on Wednesday after housing starts hit a four-year high. At the same time, the Dow Jones Industrial Average was weighed down by IBM after it posted weak revenue.

Homebuilders' shares led gains after the Commerce Department said groundbreaking on new homes rose 15 percent in September, the sharpest increase since July 2008. The surge in housing starts was viewed as evidence that the housing sector's fledgling recovery is bolstering the recovery of the broader economy.

IBM was a notable disappointment after the company said revenue fell short of expectations. The stock fell 4.9 percent, exerting an 81-point drag on the Dow industrials. IBM has an outsized influence on the Dow, which is a price-weighted index. IBM's stock closed at $200.63. Intel was down 2.5 percent to end the day at $21.79, a day after giving a weak revenue outlook..

Although it's still early in the earnings season, the results have been a bit better than anticipated. Fourteen percent of S&P 500 companies have already reported earnings, and of those companies, 65 percent have beaten analysts' expectations, ahead of the long-term average of 62 percent.

According to Thomson Reuters data through Wednesday afternoon, quarterly earnings for S&P 500 components are now expected to fall 1.7 percent from a year ago, a modest improvement in expectations from a forecast for a drop of 2.3 percent earlier in the week.

Bank of America fell 0.2 percent to $9.44 after reporting that it earned just $340 million during the quarter, down 95 percent from the year-ago period. The bank also said it had provided $4.75 billion in first lien principal reductions and expected to meet total obligations within the first year of the National Mortgage Settlement.

Over the past three days, the S&P 500 has gained 2.3 percent - its best three-day advance in more than a month. The benchmark index is now just 0.33 percent off its 2012 closing high.

After the bell, shares of Ebay fell 0.5 percent to $47.95 following the release of its results. The stock ended the regular session at $48.20, off just 0.08 percent.

Shares of American Express fell 0.6 percent to $59 after the bell after the company said third-quarter profit rose only marginally as card members reined in their spending. American Express, a Dow component, closed on Wednesday at $59.37, up 1.3 percent in regular trading.

Among Wednesday's biggest losers during the regular session was Apollo Group, down 22.2 percent to close at an 11-year low of $21.40. Shares of Apollo, the owner of the University of Phoenix, the largest domestic for-profit college, fell after the company forecast a weak 2013 and announced new student sign-ups were down by14 percent for the fourth quarter ended August 31. Apollo said it would save $300 million by fiscal year 2014 by cutting jobs and shutting half of its University of Phoenix learning sites.

ASML, the world's leading chip gear maker, agreed to buy Cymer, its key supplier of a light-based technology crucial to making a new generation of much smaller and smarter chips, for $2.5 billion. Cymer's shares gained 49.4 percent to $71.45. In contrast, the U.S.-listed shares of ASML fell 6.5 percent to $50.08.

Volume was roughly 6.3 billion shares traded on the major equity exchanges, as compared to the year-to-date average daily closing volume of 6.51 billion shares.

Housing Starts Higher

New home construction rose sharply during September, reaching its fastest pace in more than four years, a sign the housing sector's recovery is gaining traction and supporting the wider economic recovery. To that end, housing starts increased 15 percent last month to a seasonally adjusted annual rate of 872,000 units, beating even the most optimistic forecasts on Wall Street, Commerce Department data showed on Wednesday.

It was the quickest pace of groundbreaking since July 2008, though data on starts is volatile and subject to substantial revisions. Wednesday's data showed that housing, which was battered by the 2007-09 recession, is increasingly one of the brighter spots in the economy.

Home building could add to growth this year for the first time since 2005 and the brighter economic signal is likely to be welcomed at the White House, where a sluggish economy is weighing on President Barack Obama's chances of re-election next month.

Economists estimate that for every new house built, at least three new jobs are created. Groundbreaking on new homes rose across much of the country, and was up 20.1 percent in western states and fell 5.1 percent in the Northeast.

Housing remains hampered by a glut of unsold homes, and the housing starts rate is still about 60 percent below its January 2006 peak. Home building now makes up just over 2 percent of the economy, so it is unlikely to fuel a big acceleration in the recovery anytime soon. The European debt crisis looms heavily over the economic outlook, as does the possibility Washington could hike taxes and cut spending next year.

September groundbreaking for single-family homes, the largest segment of the market, rose 11 percent to a 603,000-unit pace - the highest level since August 2008. Starts for multi-family homes climbed 25.1 percent.

Building permits grew 11.6 percent to a 894,000-unit pace in September. Home sales have been rising and the decline in prices since 2006 appears to have plateaued. That has helped home-builder sentiment, which this month rose to a fresh six-year high.

In a bid to help the economy by encouraging people to buy homes, the Fed said last month it would buy $40 billion in mortgage-backed securities every month until the jobs outlook improves substantially.

The Fed's efforts to lower borrowing costs have pushed interest rates on 30-year mortgages to all-time lows. Last week, fixed 30-year mortgage rates rose 1 basis point to average 3.57 percent, the Mortgage Bankers Association said. Applications for home mortgages fell last week, but demand for purchase loans, a leading indicator of home sales, reached the highest level since June, the association said.