MarketView for December 26

Summary

The major equity indexes were lower again on Wednesday for the third straight day, dragged lower by retail stocks after a report showed consumers spent less in the holiday shopping season than last year. In addition, it seems that concerns about the "fiscal cliff" did it part to keep shoppers away from stores, suggesting markets may struggle to gain any ground until that issue is resolved. The CBOE Volatility Index, Wall Street's favorite barometer of investor anxiety, rose 4.46 percent, closing above 19 for the first time since November 7.

The S&P 500 has fallen 1.5 percent over the past three sessions, the worst three-day decline since mid-November. The Dow Jones Transportation Average, viewed as a proxy for business activity, fell 0.6 percent.

A number of 2012's strongest performers advanced, a sign that portfolio managers may be engaging in "window dressing," a practice where market participants buy securities with big gains to improve the appearance of their holdings before presenting the results to clients. Bank of America, which has more than doubled in 2012, added 2.6 percent to $11.54 on Wednesday.

Holiday-related sales rose 0.7 percent from October 28 through December 24, compared with a 2 percent increase last year, according to data from MasterCard Advisors SpendingPulse.

President Barack Obama is due back in Washington early Thursday for a final effort to negotiate a deal with Congress to bridge a series of tax increases and government spending cuts set to begin next week, the so-called "fiscal cliff" many economists worry could push the U.S. economy into recession if it takes effect.

Coach fell 5.9 percent to $54.13 as the S&P 500's biggest decliner, followed by Amazon.com, down 3.9 percent at $248.63, and Abercrombie & Fitch, off 3.5 percent at $45.44. Ralph Lauren, Limited Brands and Gap also ranked among the S&P 500's largest decliners.

J.C. Penney was a notable exception to the weakness in retail stocks, ending the day up 4.4 percent to $20.75 as the S&P 500's largest gainer. It was followed closely by Bank of America and Genworth Financial, which each gained nearly 3 percent for the day.

During the last five trading days of the year and the first two of next year, it's possible for a "Santa rally" to occur. Since 1928, the S&P 500 has averaged a gain of 1.8 percent during that period and risen 79 percent of the time.

Single-family home prices rose in October, reinforcing the view that the domestic real estate market is improving, as the S&P/Case-Shiller composite index of 20 metropolitan areas gained 0.7 percent in October on a seasonally adjusted basis.

The day's volume was the lightest full day of trading so far in 2012. Many senior traders were still on vacation during this holiday-shortened week and major European markets were closed for the day. As a result, a mere 4.01 billion changed hands on the three major equity exchanges, a number, well below the daily average so far this year of about 6.48 billion shares.

Retail Weaker Than Expected

Holiday retail sales this year grew at the weakest pace since 2008, when the nation was in a deep recession. In 2012, the shopping season was disrupted by bad weather and consumers' rising uncertainty about the economy.

A report that tracks spending on popular holiday goods from MasterCard Advisors SpendingPulse, indicated today that sales in the two months before Christmas increased 0.7 percent, compared with last year.

In 2008, sales declined by between 2 percent and 4 percent as the financial crisis that crested that fall dragged the economy into recession. Last year, by contrast, retail sales in November and December rose between 4 percent and 5 percent, according to ShopperTrak, a separate market research firm. A 4 percent increase is considered a healthy season.

Shoppers were buffeted this year by a string of events that made them less likely to spend: Superstorm Sandy and other bad weather, the distraction of the presidential election and grief about the massacre of schoolchildren in Newtown, Conn. The numbers also show how Washington's current budget impasse is trickling down to Main Street and unsettling consumers. If Americans remain reluctant to spend, analysts say, economic growth could falter next year.

In the end, even steep last-minute discounts weren't enough to get people into stores, said Marshal Cohen, chief research analyst at the market research firm NPD Inc.

Holiday sales are a crucial indicator of the economy's strength. November and December account for up to 40 percent of annual sales for many retailers. If those sales don't materialize, stores are forced to offer steeper discounts. That's a boon for shoppers, but it cuts into stores' profits.

Spending by consumers accounts for 70 percent of overall economic activity, so the eight-week period encompassed by the SpendingPulse data is seen as a critical time not just for retailers but for manufacturers, wholesalers and companies at every other point along the supply chain.

The SpendingPulse data include sales by retailers in key holiday spending categories such as electronics, clothing, jewelry, luxury goods, furniture and other home goods between Oct. 28 and Dec. 24. They include sales across all payment methods, including cards, cash and checks.

It's the first major snapshot of retail sales during the holiday season through Christmas Eve. A clearer picture will emerge next week as retailers like Macy's and Target report revenue from stores open for at least a year. That sales measure is widely watched in the retail industry because it excludes revenue from stores that recently opened or closed, which can be volatile.

Yet, despite the weak numbers out Tuesday, retailers still have some time to make up lost ground. The final week of December accounts for about 15 percent of the month's sales. As stores offer steeper discounts to clear some of their unsold inventory, they may be able to soften some of the grim results reflected in Tuesday's data.

Still, this season's weak sales could have repercussions for 2013. Retailers will make fewer orders to restock their shelves, and discounts will hurt their profitability. Wholesalers, in turn, will buy fewer goods, and orders to factories for consumer goods will likely drop in the coming months.

In the run-up to Christmas, analysts blamed the weather and worries about the "fiscal cliff" for putting a damper on shopping. Sandy battered the Northeast and Mid-Atlantic States in late October. Many in the New York region were left without power, and people farther inland were buried under feet of snow. According to McNamara, the Northeast and mid-Atlantic account for 24 percent of U.S. retail sales.

Buying picked up in the second half of November as retailers offered more discounts and shoppers waylaid by the storm finally made it into malls, he said.

But as the weather calmed, the threat of the "fiscal cliff" picked up. In December, lawmakers remained unable to reach a deal that would prevent tax increases and government spending cuts set to take effect at the beginning of 2013. If the cuts and tax hikes kick in and stay in place for months, many economists expect the nation could fall back into recession. Wanting to make sure you did not forget this, the news media discussed this possibility more intensely as December wore on, making Americans increasingly aware of the economic troubles they might face if Washington is unable to resolve the impasse.

The results were weakest in areas affected by Sandy and a more recent winter storm in the Midwest. Sales declined by 3.9 percent in the mid-Atlantic and 1.4 percent in the Northeast compared with last year. They rose 0.9 percent in the north central part of the country. The West and South posted gains of between 2 percent and 3 percent, still weaker than the 3 percent to 4 percent increases expected by many retail analysts.

Online sales, typically a bright spot, grew only 8.4 percent from Oct. 28 through Saturday, according to SpendingPulse. That's a dramatic slowdown from the online sales growth of 15 to 17 percent seen in the prior 18-month period, according to the data service.

Online sales did enjoy a modest boost after the recent snowstorm that hit the Midwest. Online sales make up about 10 percent of total holiday business.

Home Prices Rise Again

Single-family home prices rose in October for nine months in a row, reinforcing the view the domestic real estate market is improving and should bolster the economy in 2013, a closely watched survey showed on Wednesday.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.7 percent in October on a seasonally adjusted basis. While record low mortgage rates and modest job growth should keep the housing recovery on track, analysts cautioned home prices face downward pressure from a likely pickup in the sales of foreclosed and distressed properties and reduced buying investors and speculators.

Prices in the 20 cities rose 4.3 percent year over year, beating expectations for a rise of 4.0 percent. Las Vegas posted the biggest monthly rise on a seasonally adjusted basis at 2.4 percent, followed by a 1.7 percent increase in San Diego, the latest Case-Shiller data showed. Housing contributed 10 percent to the overall U.S. economic growth in the third quarter, while the sector represented less than 3 percent of gross domestic product.

Excluding seasonal factors, however, home prices in 12 of the 20 cities fell in October from September as home values tend to decline in fall and winter. Chicago experienced the largest non-seasonally adjusted decline at 1.5 percent, followed by a 1.4 percent fall in Boston.