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• After falling in March, durable goods orders increased 3.3% in April
• Weak growth in orders and high levels of inventories signal only modest employment growth
• S&P 500 Index still on course for our 2013 target of 1,720

April durable goods orders rose 3.3% from March. Excluding the volatile transportation component, orders rose 1.3%. Shipments of durable goods decreased 0.6% after increasing 3.3% in March. Inventories reached their highest level since the series began in 1992.

Defense aircraft and parts orders rose 53% for the month but are down 37.6%, reflecting the anticipated and actual effects of the sequester. The big drag from cuts to defense should be pretty well behind us. While defense might not add much to growth, it might not subtract much more.

The major stock indexes plummeted at the open following a huge sell-off in Japan’s stock market and hints from Chairman Ben Bernanke on Wednesday that the Federal Reserve might soon curtail its bond-buying program. But as the session advanced, the indexes clawed their way back to near break-even levels. The Dow lost 12 points, the Nasdaq fell by 3, and the S&P 500 declined by 4. After Hewlett-Packard reported better than expected earnings on Wednesday evening, the price of its shares (HPQ) jumped 17% and led the Dow’s gainers in today’s session. Twenty-one of the Dow’s 30 components lost ground, led by Alcoa (AA), which lost almost 2%. Volume was light. Decliners led advancers on the NYSE by three to two, but on the Nasdaq, the decliners and advancers ran nose to nose. The prices of Treasuries strengthened, and the price of gold futures jumped 1.78% to $1,391.80 an ounce. The price of crude oil on the New York Mercantile Exchange edged lower by 0.03% to $94.25 a barrel.

In Earnings News:

The airline industry is trying a new business model: carrying freight (say, a $450,000 Aston Martin) in addition to passengers. (Bloomberg)

There’s really no story here. I just wanted to share a really great headline. (The LA Times)

Scientists in Uruguay have made it easier for you to count sheep as you fall asleep…by making them glow in the dark. (Nature World News)

This is one of those “Huh...who knew?” articles, as in “Who knew people would pay so much for a pigeon?” (I bet you thought I was going with the Bea Arthur painting, didn’t you?) (Miami Herald)

When you think of smuggling something across a border, I’m pretty sure KFC isn’t top of mind. But it’s a growing business in Gaza. (The Christian Science Monitor)

Do you know how much risk your target date funds are taking? Jim Lauder, CEO of Global Index Advisors and subadvisor of Wells Fargo Advantage Fund's Target Date suite of investment products, recently published an editorial in industry publication Ignites, arguing that many target date managers could be exposing clients to excessive amounts of risk, particularly clients near retirement.

From the editorial:

The potential impact on participants' retirement savings if they are exposed to excessive risk near retirement can be devastating. Evaluating portfolio managers on long-term participant outcomes is a stretch, but as an industry, it is the direction we need to go. As asset managers, we have an obligation to design retirement products for the long-term benefit of those we serve. We believe in managing risk for the long haul.

Continue reading (pdf).

The Japanese stock market, as measured by the Nikkei 225, dropped more than 7%, while the yen strengthened by more than 1.65%. This is after weakness in the U.S. stock market and a rise of the 10-year Treasury to more than 2%. Major indexes in Europe and the U.S., meanwhile, opened sharply lower, although losses were nowhere near as dramatic as the Nikkei’s. Does this presage a more pronounced movement down in the markets? Probably not.

To me, it looks like the market moves were driven by confusion over central bankers’ commitments to continue easing and concern over the pace of deceleration of the Chinese economy. The Bank of Japan upgraded its growth outlook, but it simply affirmed its previously announced expansionary policy plan. In the U.S., Chairman Bernanke testified that monetary policy would be flexible and adapt to changing economic conditions. The minutes from the May meeting of the Federal Open Market Committee (FOMC) didn’t provide any new information, but it was reported that a number of participants discussed tapering asset purchases by June. It was after the release of the minutes that the market started to weaken.

The major indexes initially traded higher while Federal Reserve Chairman Ben Bernanke testified to Congress. However, stocks retreated after the release of the minutes from the Fed’s latest meeting, which indicated some Federal Open Market Committee participants were already considering reducing bond purchases, perhaps as soon as the next meeting, depending on economic data.

The Dow dropped 80 points, with 23 of its 30 components retreating; the S&P 500 fell 13; and the Nasdaq lost 38. Decliners led advancers by more than three to one on the NYSE and nearly three to one on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $10.20 to close at $1,367.40 an ounce, and the price of crude oil sank $1.90 to settle at $94.28 a barrel, initially due to a report showing plenty of supply of crude oil, but losses accelerated after the release of the Fed’s minutes.

In Earnings News:

The Bank of Japan announced that it would leave its plan of qualitative and quantitative easing, announced in April, in place. Chairman Bernanke, testifying before the Joint Economic Committee of Congress, effectively said the Federal Reserve (Fed) would leave its previously announced asset purchase program in place. So, where do we go from here?

For the Bank of Japan, it will still try to double the monetary base (currency in circulation and bank reserves) over the next two years. I doubt that this will increase the rate of inflation to 2%, the Bank of Japan’s stated goal. The problem Japan faces is not that there is not enough monetary base to support a vibrant economy. The problems Japan faces relate to a dysfunctional financial system that isn’t translating the monetary base into money supply. Only structural reforms can fix those problems, and that is the third arrow of Shinzo Abe’s plan for reviving the sleeping giant. I’ll be watching developments on the trade and regulatory fronts in Japan for signs of life. Thus far, there is a compelling reason to believe these changes will be forthcoming. Japan’s willingness to participate in talks to enter the Transpacific Free Trade Area is encouraging. It will be difficult to execute on this agreement, though, because it will require the Japanese government to open up its heavily protected agricultural and health care markets.

As North America becomes increasingly more significant in the energy production scene, what are the investment opportunities and how might this growth story transform the U.S. economy? Tom Pence, CFA, managing director and senior portfolio manager with Wells Capital Management’s Fundamental Growth Equity team explains in this excerpt of On the Trading Desk^SM from Friday, May 17, 2013.

Listen to the full interview.

To start, Tom, by what measure is North America growing relative to other energy producers?
I think we’re far ahead of our competitors right now, Peter. We’re first to really develop and exploit fracking technology, and we’ve utilized it in a way that’s dramatically driven down recovery finding costs. Before, a lot of companies thought those assets were going to be unrecoverable. This is about a 10-year cycle of exploiting our energy reserves and driving down our dependence on foreign oil in a way that’s not only going to provide very cheap oil and gas for U.S. manufacturers and consumers but also improve our overall competitiveness on a global basis. That is, I think, transformational.

How are you tapping into North America’s energy renaissance?
We have a few energy positions on right now, but frankly, we see a negative outlook on that commodity price going forward. It’s difficult to invest in the energy sector and make money when you have declining commodity prices. But absolutely we’re able to tap in to some themes that would benefit, say, Kansas City Southern [Railroad], which is benefiting from helping a lot of these disparate producers who are far away from pipelines to get their oil moved to refining centers. Quanta Services is the contractor helping build some of those pipelines and ultimately finding a permanent solution. So, yes, we can see opportunities like that up and down the market-cap spectrum as we go forward in the equity markets.

The Dow recorded gains for its 19th-straight Tuesday, pushed higher by shares of Home Depot after the home improvement retailer reported rising sales. Apple CEO Tim Cook, meanwhile, was grilled by a U.S. Senate committee investigating its tax-avoidance strategies.

The Dow rose 52 points, with 18 of its 30 components gaining ground; the S&P 500 gained 2; and the Nasdaq was up 5. Advancers led decliners by six to five on the NYSE and nine to eight on the Nasdaq. The prices of Treasuries strengthened. Gold futures lost $6.50 to close at $1,377.60 an ounce, and the price of crude oil fell 75 cents to settle at $96.18 a barrel.

In Earnings News:

Mergers and acquisitions enlivened an otherwise slow news day, with Yahoo agreeing to buy the micro-blogging website Tumblr and Actavis announcing it would acquire drug-manufacturer Warner Chilcott. Energy shares were strong, while the more defensive sectors, such as utilities and consumer staples, dragged down the major indexes.

The Dow fell 19 points, with 18 of its 30 components declining; the S&P 500 dropped 1; and the Nasdaq retreated by 2. Advancers led decliners by about four to three on the NYSE and six to five on the Nasdaq. The prices of Treasuries weakened. Gold futures gained $19.40 to close at $1,384.10 an ounce, and the price of crude oil rose 64 cents to settle at $96.93 a barrel.

In Earnings News:

“Honi soit qui mal y pense (Bad things to those who think it bad).” —Motto: Order of the Garter

I always try to be reasonable. I listen to every argument with an open mind and try to sift out the value of everything I read. If the point being made is contrary to my own views, I pay even closer attention and weigh the arguments on both sides. Sometimes, however, I begin to lose my patience. Sometimes, I just do not see the merit of a line of reasoning.

The most recent example of this is the argument that the stock market’s powerful rise (over the past six months and over the past four years) has been the product solely of Federal Reserve (Fed) largesse, not a real improvement in fundamentals, and therefore, it is bound to end badly. It has been called a “sugar high” and the “feeding of an addiction to liquidity.” It implicitly invokes a lovely but lost world where fundamentals and stocks advanced peacefully together, a time when things made sense and earnings led prices higher.

The price of gold lost ground for the seventh consecutive session, and the major stock indexes rebounded off Thursday’s retreat and closed at record highs. The Dow gained 121 points, the Nasdaq rose by 33, and the S&P 500 advanced 17. Twenty-three of the Dow’s 30 components gained ground, led by JPMorgan Chase (JPM), which rose 2.6%. Volume was light, and advancing issues outnumbered decliners by about five to two. The prices of Treasuries weakened, and the price of gold futures lost 1.60% to $1,364.70 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.90% to $96.02 a barrel.

The three major indexes gained ground for the fourth consecutive week. This week the Dow gained 1.5%, the S&P 500 rose by 1.9%, and the Nasdaq advanced by 1.8%.

In Other Business News:

As North America becomes increasingly more significant in the energy production scene, what opportunities arise for investors? And in the long run, how might this growth story transform the U.S. economy? Here with insight is Tom Pence, CFA, managing director and senior portfolio manager with Wells Capital Management's Fundamental Growth Equity team.

Listen to the podcast
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Following two days of gains, the major indexes moved higher in early trading but then retreated. The Dow lost 42 points, the Nasdaq fell by 6, and the S&P 500 declined by 8. The price of Cisco’s shares (CSCO) gained 12% after the networking giant beat earnings expectations on Wednesday. Twenty-two of the Dow’s 30 components lost ground, led by Disney (DIS), which lost 1%. Volume was light to moderate, and declining issues outnumbered advancers by almost three to two. The prices of Treasuries strengthened, while the price of gold futures slipped lower by 0.66% to $1,386.90 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.91% to $95.16 a barrel.

In Earnings News:

The growth of Netflix and the decline of AOL—mirror images in this chart that illustrates the intersection of the dial-up and broadband eras. (SplatF)

Two websites account for nearly half of all internet traffic during peak times, according to data from broadband technology manufacturer Sandvine. (The Atlantic Wire)

Eating at a certain fast-food chain known for its healthy food doesn’t exactly mean you’re eating healthy.  (New York Daily News)

But then again, if you ask the United Nations, sub sandwiches (and burgers) are overrated. We should all be eating bugs anyway. (NPR)

The Week brings you seven unique currencies from around the world that you would think only come from the Franklin Mint.

The Consumer Price Index (CPI) declined 0.4% in April. Year-on-year, the CPI is up 1.1%. Back-to-back months of declines in gasoline prices pushed the headline number lower. Over the past 12 months, food prices are up 1.5% and gasoline prices are down 8.3%. The decline in gasoline and energy prices is helping consumers bear the burden of higher taxes.

Producer prices (prices received by producers) decreased in April by 0.7%, and consumer prices (prices paid by consumers) declined by 0.4%. Deflation may be the Federal Reserve’s more immediate concern when it meets next on June 18 and 19. Considering that housing starts in April came in at a seasonally adjusted annualized rate of 853,000—down 16.5% from the March rate, but up 13.1% from April 2012—the Fed may want to keep mortgage rates low by possibly increasing the pace of mortgage-backed securities purchases. If the hallmark of the economic recovery is the recovery in housing, the Fed may not want to jeopardize the progress that has been made.

A report showed industrial production in the U.S. fell in April, while wholesale prices followed food and gasoline prices downward. Stocks traded higher, with the Dow and the S&P 500 claiming new highs. Cyclical stocks took a back seat to the more defensive utilities and consumer staples sectors.  

The Dow rose 60 points, with 23 of its 30 components gaining ground; the S&P 500 gained 8; and the Nasdaq rose 9. Advancers led decliners by six to five on the NYSE and five to four on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $28.30 to close at $1,396.20 an ounce, and the price of crude oil gained 9 cents to settle at $94.30 a barrel.

In Earnings News:

“Positive economic growth in the U.S. is likely to continue,” says Dr. Brian Jacobsen, CFA, CFP^®, chief portfolio strategist with Wells Fargo Funds Management, LLC. But not all agree. Find out why in this excerpt of On the Trading Desk^SM from Friday, May 10, 2013.

Listen to the full interview.

You think there is positive economic growth for the U.S., but not everyone may agree. What are the concerns?
Some of the biggest concerns that I hear from people are not necessarily related to the short-term outlook for the U.S. economy. It's more about the long-term outlook, and I categorize these as the dreaded Ds—debt, demographics, and decline. I think what’s on a lot of people's minds are several things: We have too much debt; our population is aging too rapidly; and perhaps we're on the decline, especially from a technological standpoint, where perhaps we have reached some sort of peak or pinnacle when it comes to innovation.

Well, let's take a look at each of these dreaded Ds. First, debt. There is certainly a lot of it. What have you to say to those who are concerned that debt could affect the U.S. economic growth story?
If you look at the United States right now, the total public debt outstanding as of May 8 was $16.784 trillion. Compare that to the U.S. gross domestic product (GDP), which is one measure of a nation's ability to pay for that debt, that's about $16 trillion. Now, we have more debt than we do GDP, and people point to that as a problem. And it can be a problem, if that persists indefinitely. It's important to remember Stein's Law—Stein was on the Council of Economic Advisors under Richard Nixon and Gerald Ford. Stein's Law simply says that what cannot continue won't. And, to an extent, I think that these trillion-dollar deficits that we've seen in the past, we're seeing those shrink a little bit. There's a lot of public attention saying that we have to do something about this deficit problem. Thankfully, we're having that conversation now as opposed to waiting say 15 years from now. If we weren't having the conversation today, then I would probably be worried.

Industrial production declined 0.5% in April after a utilities-driven 0.3% increase in March. March was unseasonably cool, so the output of utilities companies increased. April’s temperatures were a bit more normal, so utilities output declined 3.7% from the elevated March levels.

Manufacturing output declined 0.4% in April on the back of a 0.3% decline in March. Factories appear to be operating at 75.9% capacity, which is 2.8 percentage points below the long-run average. Whether it’s manufacturing for durable or nondurable goods, capacity utilization rates are below their averages. There is little need for major expansions or investment at this point.

Year-on-year, manufacturing, mining, and utilities outputs were all up, 1.3%, 4.2%, and 3.4%, respectively. Although measures like retail sales and gross domestic product have surpassed their prerecession peaks, industrial production and employment still have some catching up to do. This may raise the question of whether the market has run ahead of the economy. Perhaps, but I don’t think so. The market overshot on the way down, declining much more than the economy did. It’s probably only reasonable to assume that the market had to catch up to the economy.      

The Dow’s remarkable string of Tuesdays continued today, marking the 18th consecutive Tuesday that the blue chip index advanced. Financial stocks were particularly strong.

The Dow rose 123 points, with 26 of its 30 components gaining ground; the S&P 500 advanced 16 to settle at a new record high; and the Nasdaq was up 23, despite a 2.4% drop in Apple’s shares (AAPL). Advancers led decliners by two to one on the NYSE and seven to three on the Nasdaq. The prices of Treasuries weakened. Gold futures dropped $9.80 to close at $1,424.50 an ounce, and the price of crude oil fell 96 cents to settle at $94.21 a barrel, its fourth-straight losing session.

In Other Business News: