MarketView for December 16

Summary 

Once again an early stock rally did not have the strength to last throughout the day, thereby leaving the major equity indexes with modest gains on Friday, and the Street torn between hope that our economic data signals better times ahead and fear that Europe's debt crisis will engulf world economies.

There were more underlying currents than normal on Friday due to a "quadruple-witching," the expiration of four types of futures contracts -- equity options, stock index futures, stock index options and single stock futures.

After an early rally, buying dried up when rating agency Fitch warned of risk of recession in Europe.

Stock indexes, which of late have been highly correlated to the performance of the euro, slipped in tandem with that currency after Fitch revised its outlook on France's AAA rating to negative, which means a downgrade is possible in 12 to 18 months.

Shares of Adobe Systems rose 6.6 percent to $28.20 after results from the maker of Photoshop and Acrobat software beat Wall Street projections.

For the week, the Dow Jones Industrial Average chalked up a loss of 2.7 percent, the S&P was down 2.9 percent and the Nasdaq fell 3.5 percent.

Financials, which have underperformed the S&P 500 this week, were one of the strongest of the 10 top sectors in the benchmark index, up 0.5 percent. Credit card company Discover Financial added 5 percent to $24.23 a day after posting strong results and raising its dividend.

Online game maker Zynga opened 10 percent above its initial public offering price of $10 per share but rolled back showing that investors were concerned about the Farmville maker's dependence on Facebook. Shares hit a session low of $9 and closed at $9.50.

Consumer prices were flat in November as the price of cars and gasoline fell, while the 12-month inflation reading fell for the second straight month, which could give the Federal Reserve more room to help a still-weak economy.

Research In Motion posted a sharp a fall in earnings on Thursday, as it offered up a dismal outlook for BlackBerry shipments during the holidays and delayed an overhaul of its smartphones. The shares fell 11.1 percent to close at $13.44.

Data this week suggested a strengthening economic recovery, giving further support to equities. Jobless claims fell to a 3-1/2-year low last week and factory activity in parts of the Northeast picked up in December, data showed on Thursday. About 8.9 billion shares changed hands on the three major equity exchanges, a number that was higher than this year's average of 7.9 billion shares.

Data Gives Fed Breathing Room

Consumer prices were flat in November as prices for cars and gasoline moved lower, a further sign of lower inflation that could give the Federal Reserve more room to help a still weak economy. according to a report released by the Labor Department prior to the start of trading, The Consumer Price Index was unchanged last month.

Prices spiked earlier in the year, but the report showed the trend has shifted. Over the past 12 months, prices have risen 3.4 percent. That marked a second monthly decline from a three-year high in September.

Outside food and energy, prices climbed a faster-than-expected 0.2 percent. These so-called core prices rose 2.2 percent in the 12 months through November, up from 2.1 percent in October.

Prices for Treasury debt rose slightly on Friday as investors saw the data opening the door a bit wider to Fed stimulus, while the dollar fell against the euro as investors remained on edge over the euro zone's debt crisis.

Although our economic recovery has picked up momentum over the past few months, the Fed on Tuesday warned about turmoil in financial markets abroad and it kept the option of further monetary action on the table.

In an appearance before Congress on Friday, New York Federal Reserve Bank President William Dudley warned that a worsening of Europe's sovereign debt crisis could hit U.S. banks, potentially tightening credit for households and businesses. "Europe's problems are a serious risk for the U.S. economic outlook," he said.

In recent months, cooling gasoline prices have left more money for consumers to spend on other things, helping the economy gain some steam. In November alone, gasoline prices fell 2.4 percent.

The effects of Japan's earthquake disaster in March, including those that disrupted global supply chains and pushed auto prices higher earlier in the year are subsiding. Prices for new vehicles fell 0.3 percent in November.

Prices for food rose 0.1 percent. Within the core index, prices for apparel jumped 0.6 percent, but the increase in the department's main gauge of homeownership costs cooled to 0.1 percent from 0.2 percent in October.

The Fed has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related bonds in a further attempt to stimulate a robust recovery. It is easily within the realm of possibility that the Fed would step up bond buying later in 2012.