MarketView for October 19

Summary

The major equity indexes ended the week on Friday with their worst day since late June after General Electric and McDonald's, both barometers of the overall economy's health and part of the Dow Jones Industrial Average, added to a disappointing earnings season. At the same time, technology shares kept up a pattern of recent weakness, hurt by anemic results from Microsoft and another losing day for Google. The Nasdaq ended the day down 2.2 percent.

For the Dow, Friday's slide marked its largest loss since June 21 - with the sell-off coming on the 25th anniversary of Black Monday, when the Dow plunged 22.6 percent in its worst single-day percentage drop ever. However, for the week the Dow still managed to squeak out a gain of 0.1 percent, while the S&P 500 gained 0.3 percent despite Friday's losses.

Wall Street's mood was sour, given that a large number of companies have fallen short of top-line expectations. Of the 116 S&P 500 companies that have reported results so far, 58 percent have missed on revenue expectations, according to Thomson Reuters data.

General Electric closed down 3.4 percent to $22.03 after quarterly revenue fell short of estimates. McDonald's was down 4.5 percent at the closing bell at $88.72. Chipotle fell 15 percent to $243 after quarterly earnings fell below Street expectations.

The technology sector has been a drag on the stock market, which is a concern because it is seen as a leading indicator of market direction. Microsoft fell 2.9 percent to close at $28.64 after it said it fell short of revenue expectations because of poor sales of PCs.

Tepid results are being met with particular disappointment because expectations were low to begin with this season, with 95 negative pre-announcements for earnings per share and only 24 positive pre-announcements issued by S&P 500 corporations, Thomson Reuters data shows. Earnings are expected to fall 1.8 percent in the third quarter from a year ago.

For the week, the Nasdaq lost 1.3 percent. The sharp decline took the S&P 500 from within striking distance of its highest close of the year - at 1,465.77 set on September 14 - to testing its 50-day moving average. On Friday, the S&P 500 appeared to be testing its 50-day moving average at around 1,433. If the S&P 500 falls below that level, it could trigger more selling.

Near-term volatility is expected to rise. The CBOE Volatility Index rose 13.5 percent to close at 17.06, off its session high at 17.60. Options expiration added a bit of volatility to Friday's trading.

Approximately 7.27 billion shares changed hands on the major equity exchanges on Friday, as compared with the year-to-date average daily closing volume of 6.52 billion shares.

Existing Home Sales Fall

Existing home sales fell during September from a two-year high, a reminder that America's housing sector is a long way from a full recovery despite recent signs of improvement. Looking at the numbers, existing home sales fell 1.7 percent last month to a seasonally adjusted annual rate of 4.75 million units, matching the median forecast in a Reuters poll, data from the National Association of Realtors showed on Friday.

Housing has been a relative bright spot in the U.S. economy this year, and Friday's data did not point to a reversal in that trend. The reading for August was revised slightly higher to show re-sales at a 4.83 million-unit annual rate.

The median price for a home resale rose 11.3 percent from a year earlier to $183,900. The rise in prices appears due to both tight inventories and a downward trend in sales made under distressed conditions like foreclosures.

To support the economy, the Fed launched a program last month to buy housing-related debt, an action that has driven mortgage rates to record lows. Fed policymakers meet next week, but are unlikely to take fresh steps.

The economy has shown signs of faster growth recently, with the jobless rate falling and retail sales picking up. Threats to that momentum remain, however. The government is on track to tighten fiscal policy in January, while Europe's debt crisis also looms heavily.

Investors in stocks largely ignored the data, focusing instead on disappointing corporate earnings results that pushed major indexes lower. Four top U.S. manufacturers, including General Electric Co and Honeywell International Corp, reported weaker-than-expected sales.

Tight inventories have helped support home prices in recent months, which could help economic growth by making consumers more comfortable about their finances.

The nation's stock of existing homes for sale fell 3.3 percent last month to 2.32 million units. At the current pace of sales, inventories would be exhausted in 5.9 months, the lowest rate since March 2006, the NAR said.

Lawrence Yun, an economist at the NAR, said the drop in inventories was in part due to a weak pace of new home construction, which has pushed more people into the re-sales market. While groundbreaking at construction sites is rising, it remains about 60 percent below its 2006 peak.

At the same time, overall demand appears to be firming. The median time previously owned homes spent on market was 70 days in September, down 30.7 percent from a year ago.

Also helping prices, the share of distressed sales fell to 24 percent in September from 30 percent in the same month of 2011.

This week, Goldman Sachs estimated growth in the housing sector will likely add about a quarter percentage point to economic growth this year and could add a half point in 2013.

Much of the economic boost comes from the building of new homes, although existing home sales also help growth as people go out to buy furniture and realtors reap more in commissions.

In a bid to encourage more home purchases, the Fed said last month it would buy $40 billion in mortgage-backed securities every month until the jobs outlook improves substantially.

This program, known on Wall Street as "QE3," will add renewed support for housing in the coming months and could build on the progress already seen in the market.