MarketView for December 5

Summary 

The major equity indexes gained some ground on Monday, but the day's rally was dampened by news that Germany and other top-rated European nations could see their credit ratings cut. After the market's close, Standard & Poor's placed the sovereign ratings of Germany, France and other euro zone nations on "credit watch negative," the step that precedes a downgrade.

Markets have struggled with the euro zone's crisis for months. Hope that European policymakers were entering an endgame sent the S&P 500 to its best week in almost three years last week with a rise of 7.4 percent. At the same time, Wall Street is pretty much counting on a resolution of the European debt crisis. Optimistic investors bought shares in the morning after French President Nicolas Sarkozy said Germany and France had come to an agreement on tighter fiscal controls for the euro zone, to be voted on Friday.

Meanwhile, the S&P financial sector led for the day as shown by Citigroup, which closed up 5.9 percent at $29.83, while shares of Morgan Stanley gained 6.8 percent to close at $16.57. However, after the close, stocks futures inched lower with the announcement of the possible downgrades euro zone nations. S&P 500 futures slipped 0.5 point and were about even with fair value. Nonetheless, the Street is still hoping that the EU agreement will pave the way for the European Central Bank to buy large amounts of government bonds.

Some of the other gainers included MetLife, up 3.7 percent to close at $32.92 after the life insurer forecast 2012 earnings growth of as much as 7 percent, though its fourth-quarter outlook was below expectations.

Shares of SuccessFactors closed up 51 percent to $39.75 after Germany's SAP  announced a $3.4 billion cash deal to buy the Web-based software company.

About 7.18 billion changed hands on the three major equity exchanges, a number that was below the current daily average of 7.96 billion shares traded per day.

Economic Growth Slows a Bit

Growth in the service sector eased last month, while new orders for factory goods fell in October, indicating that while growth has certainly not turned negative, it has slowed a bit. According to the Institute for Supply Management, its services index fell unexpectedly to 52.0 last month from 52.9 the month before, dragged lower by a decline in employment.

Although the headline number for the services index was at its weakest since January 2010, business activity and new orders both improved, showing the mixed nature of expansion that also was evident in the upbeat jobs report for November. Note that an ISM reading above 50 indicates expansion.

Nonetheless, I would be good with a forecast that the United States will gradually expand at roughly a 2 percent rate next year, steering clear of recession as long as the euro-zone debt crisis is contained.

Following a series of positive readings for factory output and consumer spending, there is an excellent chance that the economy will accelerate in the fourth quarter. Macroeconomic Advisers, for example, raised its forecast for fourth quarter growth to a 3.0 percent annual rate, citing underlying strength in factory orders and shipments. Pointing to growth in services, the ISM's gauge of new orders rose to 53.0 from 52.4.

The United States is still limping back from the punishing 2007-2009 recession, with economic growth hampered by a mountain of household debt and high unemployment.

After a dismal first half of the year marred by high gasoline prices and a Japanese earthquake disaster that stung global manufacturing, U.S. economic growth rebounded in the third quarter to a 2.0 percent annual rate.

That is weaker than in previous recoveries, although growth could pick up in the last three months of the year. And a report last week showed that the unemployment rate fell to 8.6 percent in November, although it remains well above its pre-recession trend.

In a separate report on Monday, new orders for U.S. factory goods fell in October for the second straight month, suggesting a possible softening in manufacturing. That area of the economy has been a key support for the recovery. The Commerce Department reported that orders for manufactured goods decreased 0.4 percent.