Stocks Retreat from Recent Gains

A selling mood for stocks dominated Friday, despite higher guidance from FedEx and a stronger-than-expected consumer confidence reading. Gold topped $1,006

Stocks fell Friday, ending a five-day winning streak for the equity market despite good news from FedEx (FDX) and signs of improving consumer confidence. The U.S. dollar and oil prices slipped lower, while gold moved above $1,000.

Major indexes had moved to their highest point in 2009 on Thursday, but on Friday they backed off: The 30-stock Dow Jones industrial average dropped 22.07 points, or 0.23%, to 9,605.41. The broad Standard & Poor's 500-stock index lost 1.41 points, or 0.14%, to 1,042.73. And the tech-heavy Nasdaq composite index edged down 3.12 points, or 0.15%, to 2,080.90.

Despite the losses, stocks still ended the shortened Labor Day week higher, with the S&P 500 up 2.6%. Investors continue to respond to improvements in the economic outlook, though some remain worried about the recovery's pace and durability.

One sign that investors are still seeking safety is the surge in gold prices to above $1,000 again this week. Gold closed at $1,006.20 on Friday.

"Things have improved, but I don't know we're in a place yet where we can say this is a great environment," says Michael Church, portfolio manager at Addison Capital Management. "There are a lot of headwinds out there."

Among the optimistic signs Friday was a better-than-expected profit outlook issued by global shipper FedEx. However, FedEx chief financial officer Alan B. Graf Jr. said in a statement: "Despite some encouraging signs in the global economy, it is difficult to predict the timing and pace of any economic recovery."

Still weighing on the market is the pace of job losses. Deere & Co. (DE) announced it was putting 367 manufacturing employees on "indefinite layoff" this month due to lower demand for an Illinois factory's products. Sonoco Products (SON) said it will close an Ohio paper packaging plant by March, citing a 25% reduction in orders caused by the decline in home construction.

Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN), believes the U.S. economy is growing again. However, he is concerned about the "persistent high readings in new unemployment claims." Consumer sales and trends in mortgage foreclosures, credit card defaults and individual bankruptcies could all worsen "if people are losing their jobs or people are afraid of losing their jobs," Gambera says.

Despite job losses, consumers' moods may be improving. Friday's preliminary September reading of the University of Michigan's Consumer Sentiment survey rose to 70.2. The better-than-expected reading is up from 65.7 in August, and was at 70.3 a year ago. The current conditions index rose to 71.8 from 66.6 (it was 75.0 last September). The economic outlook index rose to 69.2 from 65.0 (it was 67.2 last year).

"Overall, today's report reflected increased optimism towards economic recovery, but the overall index is still far below its pre-recession levels," said Theresa Chen of Barclay's Capital. "We expect consumer sentiment to continue on an upwards trend as the general economy improves."

The reading "may provide some comfort that the consumer is not slipping back in early September despite continued job losses," said John Ryding of RDQ Economics. "Sentiment is probably being buoyed by the continued solid performance of the equity market."

Another test of consumer sentiment will be August retail sales figures, to be released Sept. 15. Economists expect last month's sales to rise 1.8%.

In other economic news Friday, U.S. wholesale sales rose 0.5% in July, while inventories dropped 1.4%. June's 0.4% sales increase was revised down to 0.3%. The 1.7% drop in June inventories was revised down to -2.1%. The inventory-sales ratio slipped further to 1.23 from a revised 1.25 in June (was 1.26 in June). The data are a little softer than expected, says Action Economics.

There was little market reaction to a report showing import price index for August increased 2.0% from July, but fell 15.0% year-over-year. Economists expected prices to rise 1.0% on the month and drop 15.9% on an annual basis.

The dollar index fell to 76.67, dropping to fresh trend lows versus the euro and the yen after the consumer sentiment report. Crude oil slipped below the $70 mark, down 3.8% to $69.23 per barrel. Treasuries rose, with 10-year notes yield falling to 3.34%.

FedEx (FDX) raised its first-quarter earnings forecast on Friday, citing better-than-expected international shipments and cost-cutting. The delivery company sees first quarter EPS of $0.58, vs the $0.44 consensus estimate and up from its $0.30-0.45 prior guidance. It sees second quarter EPS of $0.65-0.95, vs $0.70 consensus forecast. But FedEx also sounded cautious. "Revenue per shipment declined year over year in each of our transportation segments, as fuel surcharges declined significantly and we continue to face a very competitive pricing environment combined with significant overcapacity in the LTL freight market," the company said in a release.

Among other stocks in the news, Campbell Soup (CPB) reported fourth quarter (ending July) earnings of $0.30 per share (excluding items), $0.04 better than the consensus estimate. Campbell sees fiscal 2010 adjusted net earnings per share growth of between 5-7% from the year before, and a rise in net sales of 3%-4%. This guidance is consistent with Campbell's long-term growth targets. "We also improved our gross margins through a combination of pricing actions and productivity improvements and generated more than $1 billion in cash flow from operations," the company said.

Late Thursday, National Semiconductor (NSM) reported lower profits and forecast 3-8% gains in sales. Earnings came to 13 cents per share, on a 32% drop in sales from a year ago to $314.4 million. Analysts expected 7 cents per share on sales of $300.5 million, according to Thomson Reuters. The stock fell Friday.

Late Thursday, Morgan Stanley (MS) announced its CEO John Mack will be replaced by brokerage head James Gorman, with Mack retaining the chairman role.

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