Stocks end up on good economic news
The Dow rose about 56 points, with Merck and DuPont gaining and Bank of America and Cisco falling
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Fifth Third Bancorp, meanwhile, rose after Baird upgraded the regional bank to "outperform" from "neutral," and raised its price target slightly to $17 from $16.Skip to next paragraph
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Capital One Financial shares slipped even after the credit-card distributor said defaults fell to their lowest point in more than two years. Other institutions also reported a decline in charge-offs, including Discover Financial and American Express.
Apple also was weak on Friday as Cirrus Logic , a supplier, reported a charge and lower fourth-quarter margins as a result of manufacturing problems with an audio circuit. Cisco's shares also fell after Auriga downgraded the stock to "hold" from "buy," and cuts its price target to $19 a share from $23.
In health care, Merck rose after it ended a two-year dispute with Johnson & Johnson over Remicade, an inflammatory drug.
Oil prices turned higher in the face of surging Chinese inflation and a boost in U.S. consumer sentiment. London Brent crude rose 1.19 percent on Friday to close at $123.45 a barrel. For the week, Brent fell 2.12 percent. U.S. light crude, meanwhile, rose 1.43 percent on Friday to close at $109.66, but it was down 2.78 percent for the week.
He pointed to strength in industrial production and capacity utilization as well as improvement in the Empire State manufacturing survey as confirmation the manufacturing sector is getting stronger. But earnings, Orlando said, have been pretty mixed.
"We're developing a thought that maybe we are sort of peaking at the margin level," he said.
That's because companies seem to be reporting strength in revenues, but weakness in earnings, which would indicate profit margins are being hurt. Orlando cites three reasons for the squeeze: a nine-year high in worker productivity, negative unit labor costs in the last two years, and a surge in nominal inflation, which includes food and energy prices.
The sustained strength in productivity means companies are at the point where they need to hire workers, and wage inflation, coming from such low levels, may start to build. Also a lot of companies haven't been able to pass along higher raw materials costs, which is eating into margins.
Yet Orlando cautions that with only a handful of key earnings reports out so far, it's too early to come to a conclusion. Still, investors are taking a cautious stance and favoring stocks in defensive sectors, like health care and utilities. Consumer staples have also done well this week.
"We're starting to get a bit of a flight to safety trade here," Orlando said. "More 'beta-sensitive' categories are a little soft."
In economic news, The Thomson Reuters/University of Michigan's preliminary April reading on consumer sentiment rose to 69.6 from 67.5 in March, despite rising gas prices. The result was better than the 68.5 median forecast from economists surveyed by Reuters.
Also, industrial production rose 0.8 percent in March from a 0.1 percent gain in February, while capacity utilization rose to 77.4 percent in March from 76.9 percent in February, the Federal Reserve reported on Friday.
Meanwhile the consumer price index for March rose 0.5 percent, in line with February's gain, while core CPI rose 0.1 percent after gaining 0.2 percent the month before, the Labor Department said. Core CPI, which was better than expectations for a 0.2 percent rise, shows inflation, not including food and energy prices, remains subdued.
The Empire State Index of manufacturing rose to 21.70 in April from 17.50 in March.
Meanwhile in China, consumer price inflation rose 5.4 percent in the year to March, China said on Friday, which is the fastest rate since July 2008. The market had expected Chinese inflation rose 5.2 percent.
In Europe, inflation climbed higher than expected in March to 2.7 percent year-on-year. It is the fourth month in a row that inflation has been above the ECB's target of 2 percent. European shares were also weaker as peripheral country debt issues resurfaced.