MarketView for December 23

 

 

Summary

 

Despite a lower S&P 500 index, thereby ending five days of gains, optimism remains undaunted on Wall Street as the level of economic activity continues to increase. However, trading volume was the lightest of the year with just 4.56 billion shares changing hands on the New York Stock Exchange, the American Stock Exchange and Nasdaq as Wall Street prepared for the Christmas holiday. The markets are closed on Friday.

 

For the week, the Dow Jones industrial average added 0.7 percent, the Nasdaq took credit for a gain of 0.9 percent, while the S&P 500 was up 1 percent. It was the fourth week of gains for the Dow and S&P and the fifth week of gains for the Nasdaq. Although some technical and sentiment indicators auger signs of an over-bought situation, it appears that investors remain optimistic over the long run. The latest American Association of Individual Investors' survey found bullish sentiment rose 13.1 percentage points to 63.3 percent, as of December 23, a six-year high.

 

The day’s economic data was mixed. Consumer sentiment rose in December to its highest level since June, and durable goods demand rose sharply higher. First-time claims for jobless benefits edged down, but a rise in new home sales in November came in below expectations.

 

Banks dragged on the market, giving back recent gains after a strong month. Bank of America ended the day down 2.4 percent to close at $13.06, while JPMorgan Chase closed down 0.2 percent at $42.00.

 

Market watchers say the market is likely to see more upside in the remaining five trading days of the year after a 6.5 percent gain for the month put the S&P 500 up 12.7 percent for 2010. Birinyi Associates has said that the market rallies 73 percent of the time from the close before Christmas Day to the last close of the year for an average return of 1.34 percent.

 

Commodities led the way up as the price of oil rose to a more than two-year high above $91 a barrel. As a result, Chevron ended the day up 0.9 percent at $90.68.

 

Retail stocks added some gains after Bed Bath & Beyond beat earnings estimates and forecasted a strong holiday shopping season. As a result, Bed Bath & Beyond closed up 5.1 percent at $50.10.

 

Jo-Ann Stores chalked up a share price gain of 31.9 percent to close at $60.19 after it agreed to a buyout by private equity firm Leonard Green & Partners for $61 per share.

 

Micron Technology weighed on the Nasdaq, its share price falling 4.1 percent to $7.94 after it forecast lower pricing for NAND chips, which are used in smartphones and tablet computers.

 

Consumer Sentiment Up Sharply

 

Confidence among consumers rose in December to its highest level since June, on improved job prospects and larger discounts from retailers, a survey released on Thursday showed. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment came in at 74.5, up from 71.6 in November.

 

"The overall tenor of news about recent economic developments was on balance more favorable than at any time during the past six years," wrote Richard Curtin, the survey's director.

 

Twenty-seven percent of consumers spontaneously reported upbeat news about employment gains, the highest proportion since 1983, he wrote.

 

The survey's barometer of current economic conditions was 85.3 in December, up from 82.1 percent in November but below a forecast of 86.

 

The survey's gauge of consumer expectations, which more closely projects the direction of consumer spending, rose to 67.5, also the highest level since June. That was above November's 64.8 percent, and in line with expectations.

 

Households said they expect an inflation rate of 3 percent a year from now, unchanged from November. Americans' forecast for inflation over the next five years held at 2.8 percent for a third month in a row.

 

Diamond to Be Renominated to Fed

 

President Barack Obama will once again nominate economist Peter Diamond to the Federal Reserve Board next year, a White House official said on Thursday, setting up a potential clash with Republicans who will have more influence in the new Senate. The Senate scuttled Diamond's nomination on Wednesday by failing to vote on it before adjourning a lame-duck legislative session for the year.

 

The Obama administration views Diamond, a Nobel prize-winning economist at the Massachusetts Institute of Technology, as extremely well qualified for the job.

 

Asked about the renomination decision, a White House official pointed to the president's remarks on Diamond in October when he was a joint winner of the 2010 Nobel prize in economics with Dale Mortensen for their work on labor markets.

 

Obama said then that their research "has applications in a wide range of areas, like unemployment and housing, where we need our best and brightest minds," and added:

 

"I have nominated Peter to the Board of Governors of the Federal Reserve to help bring his extraordinary expertise to our economic recovery."

 

Republican Senator Richard Shelby, who will be back when the Senate reconvenes on January 5, had placed a so-called hold against confirmation of Diamond.

 

Diamond has strong expertise on budget and tax issues, but this research focus prompted criticism from some Republicans who argued he lacked the proper experience on monetary policy. He has been unusually vocal on a wide range of topics for a nominee who was still awaiting Senate confirmation. Diamond expressed his opposition to extending Bush-era tax cuts for the wealthy stating that, "It would not be good policy.

 

Economy Keeps on Rolling Forward

 

Durable goods demand rose sharply in November and consumer spending rose for the fifth straight month, cementing views of a solid economic growth pace in the fourth quarter. The brightening outlook was also bolstered by other reports on Thursday showing an improving labor market and consumer sentiment, although the housing market continues to be bogged down.

 

Durable goods orders excluding transportation increased 2.4 percent last month, the largest advance since March, the Commerce Department said. The increase followed a 1.9 percent drop in October and beat economists' expectations for a 1.6 percent rebound.

The economy grew at a 2.6 percent annualized pace in the third quarter as recent upbeat data ranging from retail sales to trade has led to expectations that GDP will expand at a 3 percent to 3.5 percent pace over the final three months of the year.

 

Despite the optimistic data on durable goods excluding transportation, overall orders dropped 1.3 percent last month, dragged down by a plunge in the volatile civilian aircraft component. A gauge for business spending rebounded 2.6 percent in November after dropping 3.6 percent the prior month.

 

In another report, the department said consumer spending rose 0.4 percent, a touch below expectations for a 0.5 percent gains. October's spending was revised up 0.7 percent.

 

Manufacturing has largely led the economy's recovery from the worst recession since the Great Depression of the 1930s, but the spending data offered more evidence that the handover of the baton to consumers was under way.

 

Consumer spending accounts for more than two-thirds of U.S. economic activity. The spending report suggested consumer spending probably accelerated in the current quarter after growing at a 2.4 percent rate in the July-September period.

 

There was also encouraging news on the labor market, with initial claims for state unemployment benefits falling 3,000 last week to 420,000, matching economists' expectations. Last week's claims data covered part of the survey period for the government's closely watched employment report for December.

 

Signs of strengthening economic activity helped to lift crude oil prices to two-year highs.

 

Although consumers are spending again, inflation remains muted. The Federal Reserve's preferred measure of consumer inflation, the personal consumption expenditures price index, excluding food and energy, rose 0.1 percent after being flat for four straight months.

 

In the 12 months through November, the core PCE index rose 0.8 percent, the same margin as in October and still the smallest year-on-year gain since records started in 1960.

 

While the broader economy is now firmly on an upward trajectory, other data from the Commerce Department underscored that housing continues to struggle. New single-family home sales increased 5.5 percent to a seasonally adjusted 290,000 unit annual rate in November, less than economists' expectations for a 300,000 unit pace.