MarketView for December 23

Summary 

The S&P 500 turned positive for the year and closed out its third week of gains on Friday as equities extended their rally after a string of unexpectedly strong economic data. The S&P has gained nearly 5 percent over its run of four straight winning days, putting it slightly higher for the year while volume continued to be seasonally light.

Key among the reasons for the gains is improved economic data and seasonal factors behind the move, while a deal to extend the payroll-tax cut for two months also added to the enthusiasm. New single-family home sales rose to a seven-month high in November and the supply of houses on the market was the lowest in 5-1/2 years, giving hope for a recovery in the sector.

Meanwhile, the S&P 500 edged above its 200-day moving average, a level that has proved difficult to maintain after plummeting below it in August. However, low holiday-season volume means that there is a considerable amount of investor wariness.

For the week, the Dow gained 3.6 percent, the S&P 500 climbed 3.7 percent, and the Nasdaq advanced 2.5 percent.

Volume was light ahead of the extended Christmas holiday weekend, which could spark exaggerated market swings next week. The New York Stock Exchange observed normal trading hours, but the bond market closed early, at 2:00 p.m.

The day's big gainers included consumer discretionary and information technology stocks. Utilities considered a defensive play, were the day's relatively weakest group.

Congress approved a two-month extension of a payroll-tax cut for 160 million workers that otherwise would have expired on December 31. The resolution, if only temporary, removes a market headwind that investors said could have hit growth next year.

SunPower rose 2.6 percent to close at $6 after the solar panels maker reached a deal to acquire rival Tenesol, a unit of France's Total SA. At the same time, Total is buying 18.6 million SunPower shares, raising its stake to about 66 percent.

Shares of Rambus were up 12.2 percent to $8.21. The company signed a patent-licensing deal with Broadcom, resolving all previous claims related to its technology.

WPX Energy will replace Compuware in the S&P 500 index, with Compuware replacing Exterran Holdings in the S&P MidCap 400 index, Standard and Poor's said.

Exterran will replace Skyline in the S&P SmallCap 600 index. The changes are effective at the close of trading on Friday, December 30. Exterran slid 3 percent to $9.25, and Skyline dropped 6 percent to $4.41.

More than two-thirds of stocks traded on the New York Stock Exchange closed in positive territory, while about 51 percent of Nasdaq-listed stocks closed higher.

Economic Data Still Points to Growth

Consumer spending was tepid in November and a gauge of business investment plans fell for a second month, pointing to some loss of momentum in the economy as the year ends.

The Commerce Department said on Friday consumer spending ticked up 0.1 percent after rising by the same margin in October. In another report, the Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.2 percent last month after declining 0.9 percent in October.

While the reports suggest some slowing in activity, they are unlikely to change perceptions that economic growth will top 3 percent in the current quarter after a 1.8 percent pace in July-September, boosted in part by a rebound in inventories.

When adjusted for inflation, spending rose 0.2 percent last month after a similar gain in October. The government on Thursday revised down third-quarter consumer spending growth to a 1.7 percent annual pace from 2.3 percent because of a slump in spending at hospitals.

Income ticked up 0.1 percent last month, the weakest reading since August, after increasing 0.4 percent in October. Last month's increase was below economists' expectations for a 0.2 percent rise. Taking inflation into account, disposable income was flat after rising 0.3 percent in October.

The saving rate dipped to 3.5 percent last month from 3.6 percent in October. Savings slowed to annual rate of $400.9 billion from $419.1 billion the prior month.

The report showed subsiding inflation pressures, which should help to support spending. A price index for personal spending was flat last month after falling 0.1 percent in October. In the 12 months through November, the PCE index was up 2.5 percent, the smallest rise since April. That followed a 2.7 percent increase in October.

A core inflation measure, which strips out food and energy costs, edged up 0.1 percent last month after a similar gain in October. In the 12 months through November, core PCE rose 1.7 percent after increasing 1.7 percent in October.

But the economy continues to show resilience in the face of slowing global demand. New orders for long-lasting manufactured goods jumped 3.8 percent after being flat in October.

Excluding transportation, orders rose 0.3 percent after rising 1.5 percent in October. Durable goods range from toasters to big-ticket items such as aircraft which are meant to last three years and more.