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A better-than-expected retails sales report lifted the overall market to record their largest gains in almost two months on Tuesday. After the markets recorded its first sixth consecutive week of losses since the fall of 2002 last week, gains akin to yesterday’s will enable the benchmarks avoid a seventh straight week of losses.

The Dow Jones Industrial Average (DJIA) surged 123 points or 1.0% to close at 12,076.11, recording its largest gains for the month. Posting the strongest gains since April 20, the Standard & Poor 500 (S&P 500) gained 1.3% to settle at 1,287.87. The Nasdaq Composite Index gained 1.5% and settled at 2,678.72. In what analysts termed as a relief rally, consolidated volumes on the New York Stock Exchange, Amex and Nasdaq remained low at 6.45 billion shares and were below the daily average of 7.58 billion. On the NYSE, the advance decline ratio was 2,511 to 503. The fear-gauge CBOE Volatility Index (VIX) dropped 6.3% to 18.37.

Retail sales, an indicator of consumer purchasing from the Commerce Department, did not come in exceptionally strong or significantly positive. But the figure exceeded economist’s expectations and the markets opted to focus on the positives amidst a stretch of negative economic reports that has dampened investor sentiment over several days. According to the U.S. Census Bureau: “Advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $387.1 billion, a decrease of 0.2 percent (±0.5%) from the previous month, but 7.7 percent (±0.7%) above May 2010”. Though retail sales declined for the first time in 11 months, by 0.2%, the drop was less than economists’ projection of a fall of 0.5%.

Analysts viewed this positivism as an excuse to buy into a weaker market just when the markets started to appear as oversold. Even though traders have focused on the positives in the retails sales report, concerns about the economic environment still remain, given the higher gas prices.

Separately, the Bureau of Labor Statistics announced a 0.2% jump in the seasonally adjusted Producer Price Index (PPI) for finished goods in May. The report stated: “This advance followed increases of 0.8 percent in April and 0.7 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 0.9 percent in May, and the crude goods index declined 4.1 percent”. This increase was also higher than economists’ expectation of a 0.1% increase.

Also aiding the markets were reports of higher industrial output and retail sales in China. While industrial output surged 13.3% in May, retail sales soared 16.9% year over year in May. Additionally, with reports of China’s inflation hitting its highest level in three months, the Chinese central bank raised its reserve requirement ratio by 0.50 percentage points in a bid to combat inflationary worries. The reserve banks are now to hold a record 21.5% of deposits. The National Statistics bureau of China reported that consumer prices rose 5.5% in May, driven by a 11.7% rise in food costs. This is higher than the 5.3% increase recorded in April and also surpassed the March’s 32-month record high of 5.4%.

Federal Reserve Chairman Ben Bernanke comments on the need to reduce the federal budget deficit had little impact on the markets . He warned Congress of the significance of acting “in a timely manner” and warned of the consequences of delay or a short suspension of payments on principal or interest on the Treasury’s debt obligations. He said: “Interest rates would likely rise, slowing the recovery and, perversely, worsening the deficit problem by increasing required interest payments on the debt for what might be a protracted period”.

The retail sector shared the cheer particularly helped by shares of Best Buy Co. Inc. (NYSE:BBY) and J. C. Penney Company, Inc. (NYSE:JCP). While strong earnings results helped the former gain 4.6%, shares of J.C. Penney soared 17.5% after it announced the Ron Johnson, senior vice-president of retail at Apple, will take charge as chief executive in November. Other gainers included, Target Corp. (NYSE:TGT), BJ's Wholesale Club, Inc. (NYSE:BJ), PriceSmart Inc. (NASDAQ:PSMT), Family Dollar Stores Inc. (NYSE:FDO), 99 (NYSE:NDN), Dollar Tree, Inc. (NASDAQ:DLTR) and Fred's Inc. (NASDAQ:FRED) and they were up 1.9%, 1.8%, 1.3%, 1.7%, 1.5%, 1.2% and 1.9%, respectively.

The energy sector also witnessed strong gains following the jump in crude prices. Light, sweet crude oil for July delivery increased 2.1% to $99.37 per barrel. Among the gainers in the sector were, Chevron Corp. (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM), BP plc (NYSE:BP), Marathon Oil Corporation (NYSE:MRO) and Hess Corporation (NYSE:HES), and they jumped 1.7%, 1.5%, 1.8%, 4.5% and 2.6%, respectively.

 
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