MarketView for December 22

 

 

Summary 

  

The major equity indexes gained ground on Thursday, putting the S&P 500 on the cusp of finishing out the year in positive territory as another decline in jobless claims pointed to further improvement in the labor market.

 

The S&P rose for a third day in seasonally light volume that has contributed to sharp swings recently. With the benchmark index near break-even year-to-date and the Dow Jones Industrial Average already higher for 2011, the domestic markets appeared on track to outperform such major overseas markets as China, Brazil and Europe, all of which are down more than 10 percent year-to-date.

 

The latest bit of optimism on Wall Street came from a drop in weekly claims for jobless benefits to a 3-1/2-year low. Also helping equities, consumer sentiment improved during December, hitting its highest level in six months as Americans felt better about the economy's prospects.

 

Cyclical stocks, which have come under pressure recent from uncertainties over global growth, were the day's top gainers, with financials gaining 2.1 percent, followed by energy up 1.1 percent and materials up 0.9 percent.

 

Consumer staples, considered a defensive play, comprised the weakest sector, falling 0.2 percent.

 

The CBOE Volatility index fell 1.4 percent and is down about 13 percent so far this week, putting it on track for four weeks of declines.

 

Recent gains have lifted the S&P 500 above its 50-day moving average, though the index has run into trouble when it sought to move above its 200-day moving average, currently around 1,260. Those levels have been key for the market this year.

 

Lower volume ahead of the Christmas and New Year's Day holidays has left the market susceptible to the heightened volatility this week.

 

Many of the pessimists are warning that a year-end rally would not necessarily translate into elevated expectations for 2012 because many of the issues that hit the market this year, such as slow growth and Europe's debt crisis, remained unresolved.

 

A downward revision of the Commerce Department's figures on third-quarter economic growth had little impact on stocks, with investors focused on the economy's performance in the fourth quarter. According to a report released by the Commerce Department, the economy grew at a 1.8 percent annual pace in the third quarter, down from its prior estimate of 2 percent.

 

Micron Technology rose 15.7 percent to close at $6.41 as investors looked past limp quarterly results announced late Wednesday and focused on a potential 2012 rebound in long-stagnant memory chip demand and prices.

 

Tibco Software was up 8 percent to close at $23.76 after the business software maker forecast first-quarter revenue above estimates and said fourth-quarter profit and revenues soared.

 

American Greetings fell 21.1 percent to $13.39 after third-quarter profit dropped nearly 40 percent and the company warned that 2012 cash flow would be hurt by higher expenses.

 

Volume was light, with about 5.88 billion shares changing hands on the three major exchanges, a number that was well below last year's daily average of 8.47 billion shares.

 

Unemployment Data Surprises

 

The number of number of new claims for unemployment insurance hit a 3-1/2 year low last week, bolstering views the economy was gaining momentum, even though third-quarter growth was revised downward. Initial claims for state unemployment benefits dropped 4,000 to 364,000, the Labor Department said. That was the lowest level since April 2008 and just a month after the collapse of Bear Stearns.

 

While claims for first-time unemployment benefits tend to be volatile this time of the year, they have dropped for three straight weeks. A four-week moving average, a better measure of trends, is now at its lowest level since June 2008. Nonfarm employment growth has grown by an average of 131,636 jobs per month so far this year, but not enough to significantly lower the jobless rate which is currently at 8.6 percent.

 

The claims data, which covered the survey period for the December nonfarm payrolls report, helped to take the sting out of a separate report showing the economy expanded at only a 1.8 percent annual rate in the third quarter.

 

Growth, which had previously been reported to have expanded at a 2 percent pace, was held back by a sharp drop in healthcare spending, the Commerce Department said. A month ago, it had said healthcare spending had risen. The revision to healthcare spending estimates reflected new source data, which showed losses at nonprofit hospitals.

 

However, spending on long-lasting goods was stronger than previously estimated, indicating consumer demand remained healthy.

 

Prospects for spending were boosted by the rise in consumer confidence. The Thomson Reuters/University of Michigan's sentiment index rose to 69.9 from 64.1 in November as measures of both current conditions and future expectations increased.

 

The labor market is improving, households are spending, home building is picking up and factory output is expanding, putting the economy on course for at least a 3 percent growth pace in the fourth quarter. That would be the fastest pace in 18 months.

 

An index from the private sector Conference Board that seeks to predict the strength of future economic activity rose for a seven straight month in November, suggesting the economy could pick up even more speed by spring.

 

Last quarter's growth was still a step up from the April-June period's 1.3 percent pace. Part of the pick-up in output reflected a reversal of factors that held back growth earlier in the year.

 

The drop in healthcare consumption caused consumer spending growth to fall to a 1.7 percent rate from 2.3 percent. Consumer spending accounts for about 70 percent of economic activity.

 

Business inventories fell, but not as sharply as previously reported. Restocking by businesses is expected to support growth in the fourth quarter, helping to keep factories busy. In addition, businesses showed little signs of cutting back on spending and profits continued to grow at a healthy clip. Excluding inventories, the economy grew at a 3.2 percent rate, revised down from a 3.6 percent pace.

 

Index of Leading Economic Indicators Rises

 

The Conference Board reported on Thursday that its index of leading economic indicators rose 0.5 percent in November to 118.0 (2004 = 100), following a 0.9 percent increase in October, and a 0.1 percent increase in September.

 

According to the Board, November's increase in the LEI was widespread among the leading indicators and continues to suggest that the risk of an economic downturn in the near term has receded.

 

Interest rate spread and housing permits made the largest contributions to the LEI this month, overcoming a falling average workweek in manufacturing, which reversed its October gain. The CEI also rose on improving employment and personal income although industrial production fell in November."

 

As a result, the LEI is pointing to continued growth this winter, possibly even gaining momentum by spring. For the second month in a row, building permits made a relatively strong contribution and there is a chance that the long decline in housing is finally slowing.

 

However, this somewhat positive outlook for the domestic economy is at odds with a global economy that appears to be losing steam. In particular, a deeper-than-expected recession in Europe could easily derail the outlook for the U.S. economy."