MarketView for December 14

Summary 

Stocks shed much of the day’s gains prior to the closing bell to end the day mostly flat after a late-in-the-day sell-off on Tuesday as yet another cautious statement from the Federal Reserve on the economy offset strong retail sales data for November. With trading volume still anemic, the afternoon's decline could be a sign that the major indexes have hit the upper range of a rally that has propelled them all to recent two-year highs.

The Fed, in a policy statement after its last scheduled meeting of 2010, said the economic recovery was still too slow to bring down unemployment and reaffirmed its commitment to buy $600 million in government bonds. The move pushed bond yields sharply higher and pressured financial shares, which are hurt by higher rates.

"I'm slightly disappointed that the (Fed) doesn't see the world in the same light that investors do," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

Retail sales rose for a fifth straight month in November, pointing to a firm rebound in consumer spending, which accounts for roughly two-thirds of the overall economy. However, the good news did not appear to apply to Best Buy whose share price fell after the electronics retailer posted a third-quarter profit that missed expectations and cut its full-year profit view, denting optimism over the sector. Best Buy’s shares ended the day down 14.8 percent to $close at 35.52

Financial stocks were the top losers on Tuesday, with Dow component JPMorgan Chase closing down 1.7 percent to $40.79. General Electric, Also a Dow component, expects its businesses to show solid earnings growth in 2011, with revenue flat to up 5 percent, the company said. GE ended the day up 0.4 percent to close at $17.69.

Healthcare stocks were helped out by company news. Medical device maker C.R. Bard rose 4.1 percent to $89.56 after a strong 2011 profit growth outlook, while brokerages gave high marks to companies including Amgen and Mylan. Amgen rose 4.9 percent to $56.76 and Mylan added 4.3 percent to $20.68.

About 7.2 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, well below the year's daily average of 8.61 billion.

Economic Data Continues to Improve

Retail sales for November were surprisingly strong as consumers opened their wallets despite high unemployment. Producer prices were also higher, a strong indicator that the economic recovery continued with strength during the fourth quarter.

According to a Commerce Department released on Tuesday, total retail sales increased 0.8 percent, advancing for a fifth straight month, as consumers purchased clothing and other items at the start of the holiday season and receipts at gasoline stations moved sharply higher.

At the same time, sales for October were revised upward to 1.7 percent from a 1.2 percent gain. The strong gain in sales made it abundantly clear that there is a pent up demand for consumer goods and that spending by consumers, which accounts for more than two-thirds of all economic activity, is continuing to gain strength. As a result, consumer spending was likely to far exceed the 2.8 percent annual growth rate recorded in the July-September period.

A separate report from the Labor Department indicated that producer prices increased 0.8 percent last month. Core wholesale prices, which exclude volatile food and energy prices, rose 0.3 percent.

The economy expanded at a 2.5 percent annual pace in the third quarter and data so far suggest the rate of activity accelerated in the current quarter. However, the latest economic data is unlikely to indicate sufficient strength to the Fed that it will prevent the Fed from completing its $600 billion government debt buying program intended push already low interest rates further down and stimulate demand.

Sales excluding autos increased 1.2 percent last month, the largest gain since March and exceeded economists' expectations for a 0.6 percent gain. Sales excluding autos increased 0.8 percent in October.

Sales last month were buoyed by a 2.7 percent rise in receipts at clothing and clothing accessories stores, the largest increase since March.

Consumers also spent on non-essential goods, lifting sales at sporting goods, hobby, book and music stores 2.3 percent, the biggest gain in almost a year.

Sales included a 4 percent increase in receipts at gasoline stations, which was the largest gain in a year. But motor vehicle sales surprisingly fell 0.8 percent, while building materials dipped 0.1 percent after rising 3.3 percent in October.

Core retail sales, excluding autos, gasoline and building materials, were up 0.9 percent, coming on the heels of a 0.5 percent gain in October. Core sales correspond most closely with the consumer spending component of the government's gross domestic product report. Looking ahead, you can expect the virtually certain to pass tax legislation currently under debate in Congress to increase spending next year.

Other weak spots in the retail sales report included purchases at electronics and appliance stores, which fell 0.6 percent last month and furniture sales declined 0.5 percent.

The Commerce Department also reported on Tuesday that business inventories rose 0.7 percent to $1.42 trillion in October, the highest level since February 2009, after increasing 1.3 percent in September.

Business sales were up 1.4 percent to $1.12 trillion in October, reaching the highest level since September 2008. There were up 0.8 percent the prior month. The percentage increase in sales last month was the largest since March.

Fed Continues Status Quo

The Federal Reserve on Tuesday offered only a cautious nod to the economy's improving prospects due to unemployment numbers, while at the same time reaffirming its commitment to buy $600 billion in bonds.

In a statement that emphasized job market weakness and low inflation, the Fed characterized the U.S. expansion as "continuing," a modest upgrade from its November description of the recovery as "slow." "The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment," the Fed said in a statement at the conclusion of a one-day meeting.

As widely expected, the Fed offered no policy shift. It held overnight interest rates near zero, repeated a vow to keep rates exceptionally low for an extended period and renewed its pledge to buy about $75 billion worth of bonds a month to hold down long-term interest rates.

The dollar edged up against the euro and the yen as the Fed offered no sign of expanding its bond buying, but Treasury bonds extended losses on the central bank's dovish remarks.

While offering a tempered acknowledgment of the apparent strengthening in the economy, the Fed maintained its focus on the two principle areas it is trying address: high unemployment and a slowing in already low inflation.

The Fed did not make any mention of the sharp rise in bond yields recently that threatens to thwart the Fed's campaign to lower borrowing costs. Yields on the benchmark 10-year Treasury are at highs not seen since May.

The Fed launched its program to buy longer-term Treasury securities early last month to support the weak economic recovery. The Fed had already acquired $1.7 trillion in longer-term assets from late 2008 through the beginning of this year in a bid to boost the economy after it had cut short-term interest rates to near zero.