US stocks pause after record surge
A record-breaking rally in US stocks paused yesterday as investors assessed whether the rise in stock valuations overstated the recent improvement in the economy.
The latest positive data, out yesterday, showed that Americans increased spending at retailers last month.
That suggests that consumers may boost economic growth in the current quarter ending on June 30, but it still was not enough to lift shares.
“What we have seen is a huge rally, and there aren’t any stones unturned at this point,” said Alec Young, global equity strategist at S&P Capital IQ.
“You reach a point where investors aren’t willing to bid things up any more.”
Stocks have surged this year, boosted by an improving economy, Federal Reserve stimulus and record corporate earnings.
Signs that the housing market is reviving are also supporting stocks. The Dow Jones industrial average and the Standard and Poor’s 500 index both closed at record highs on Friday.
Retail sales increased 0.1% in April from March, the Commerce Department said yesterday.
That is an improvement from the 0.5% decline in March, which was the largest drop in nine months. Economists had forecast that sales declined by 0.3%.
Consumer sentiment is improving as the housing market recovers, which is giving people the confidence to spend more, said Doug Cote, chief market strategist at ING Investment Management.
“If housing continues its upward trajectory, the animal spirits of the consumer will continue to be bolstered,” he said.
Yesterday the Dow fell 26.81 points, or 0.2%, to 15,091.68. The S&P 500 index was little changed at 1,633.77. The Dow is up 15.2% this year, and the S&P 500 is 14.6% higher.
Telecommunications companies dropped the most of any industry group in the S&P 500 index, falling 0.83%. Health care companies advanced the most, rising 0.7%.
Health care companies have risen 21.4% this year, the most of any of the 10 industry groups in the S&P 500.
Investors have been buying the stocks because they offer some growth prospects and also pay large dividends.
More than 90% of companies in the S&P 500 have reported earnings for the first quarter, and corporate earnings are projected to grow by an average of 5% for the period, according to data from S&P Capital IQ.
Earnings growth is projected to slow to 3.7% in the second quarter before climbing again in the second half of the year.
That strong earnings outlook for the end of the year means that stocks will probably end 2013 strongly, said Ron Sloan, a senior portfolio manager at Invesco.
In the immediate future though, the direction of stocks is less certain, he said.
“The trick is what happens between here to there?” said Mr Sloan. “I’m afraid that we are going to have to give back some of what we’ve made this year.”
