MarketView for December 28

Summary

Stocks fell for a fifth straight day on Friday, dropping 1 percent and marking the S&P 500's longest losing streak in three months as the federal government edged closer to the "fiscal cliff" with no solution in sight.

President Barack Obama and top congressional leaders met at the White House to work on a solution for the draconian debt-reduction measures set to take effect beginning next week. Stocks, which have been influenced by little else than the flood of fiscal cliff headlines from Washington in recent days, extended losses going into the close with the Dow Jones industrial average and the S&P 500 each losing 1 percent, after reports that Obama would not offer a new plan to Republicans. The Dow closed below 13,000 for the first time since December 4.

In a sign of investor anxiety, the CBOE Volatility Index .VIX, known as the VIX, jumped 16.69 percent to 22.72, closing at its highest level since June. Wall Street's favorite fear barometer has risen for five straight weeks, surging more than 40 percent over that time.

For the week, the Dow fell 1.9 percent. The S&P 500 also lost 1.9 percent for the week, marking its worst weekly performance since mid-November. The Nasdaq finished the week down 2 percent. In contrast, the VIX jumped 22 percent for the week.

Pessimism continued after the market closed, with stock futures indicating even steeper losses. S&P 500 futures dropped 26.7 points, or 1.9 percent, eclipsing the decline seen in the regular session.

All 10 S&P 500 sectors fell during Friday's regular trading, with most posting declines of 1 percent, but energy and material shares were among the weakest of the day, with both groups closely tied to the pace of growth.

An S&P energy sector index slid 1.8 percent, with Exxon Mobil down 2 percent at $85.10, and Chevron off 1.9 percent at $106.45. The S&P material sector index fell 1.3 percent, with U.S. Steel down 2.6 percent at $23.03.

With time running short, lawmakers may opt to allow the higher taxes and across-the-board federal spending cuts to go into effect and attempt to pass a retroactive fix soon after the New Year. Standard & Poor's said an impasse on the cliff wouldn't affect the sovereign credit rating of the United States.

Trading volume was light throughout the holiday-shortened week, with just 4.46 billion shares changing hands on the New York Stock Exchange, the Nasdaq and NYSE MKT on Friday, below the daily average so far this year of about 6.48 billion shares. On Monday, the U.S. stock market closed early for Christmas Eve, and the market was shut on Tuesday for Christmas. Many senior traders were absent this week for the holidays.

Highlighting Wall Street's sensitivity to developments in Washington, stocks tumbled more than 1 percent on Thursday after Senate Majority Leader Harry Reid warned that a deal was unlikely before the deadline. But late in the day, stocks nearly bounced back when the House said it would hold an unusual Sunday session to work on a fiscal solution.

The National Association of Realtors said contracts to buy previously owned U.S. homes rose in November to their highest level in 2-1/2 years, while a report from the Institute for Supply Management-Chicago showed business activity in the Midwest expanded in December.

Barnes & Noble ended the day up 4.3 percent to $14.97 after the chain said British publisher Pearson Plc had agreed to make a strategic investment in its Nook Media subsidiary. However, Barnes & Noble also said its Nook business will not meet its previous projection for fiscal year 2013.

Shares of magicJack VocalTec Ltd ended the day up 10.3 percent to $17.95 after the company offered up a strong fourth-quarter outlook and named Gerald Vento president and chief executive, effective January 1.

Aeterna Zentaris gained 13.8 percent to end the day at $2.47 after the company said it had reached an agreement with the U.S. Food and Drug Administration on a special protocol assessment by the FDA for a Phase 3 registration trial in endometrial cancer with AEZS-108 treatment.

Economic Data Continues Unabated

Contracts for previously owned homes reached a 2-1/2-year high in November and factory activity in the Midwest expanded this month, suggesting some strength in the economy despite the threat of tighter fiscal policy.

The National Association of Realtors said on Friday its Pending Home Sales Index, based on contracts signed last month, increased 1.7 percent to 106.4 - the highest level since April 2010 when the home-buyer tax credit expired. November marked the third straight month of gains for signed contracts, which become sales after a month or two, and followed a 5 percent increase in October.

A separate report showed the Institute for Supply Management-Chicago business barometer rose to 51.6 in December from 50.4 in November. A reading above 50 indicates expansion in the regional economy. It was the second straight month of growth and was driven by a rebound in new orders.

The data suggested some of the growth momentum from the third quarter carried into the final three months of 2012, even as businesses and households braced for sharp cuts in government spending and higher taxes in the New Year.

Data so far in the fourth quarter ranging from consumer spending, housing, employment and the various manufacturing indicators have been fairly upbeat.

There are fears that currently stalled budget talks in Washington will fail to steer clear of a $600 billion "fiscal cliff" of less government spending and higher taxes, which could tip the economy back into recession.

The economy grew at a 3.1 percent annual rate in the third quarter. The latest Reuters survey of economists put fourth-quarter gross domestic product growth at a 1.2 percent rate, mostly because of Sandy, which struck the East Coast in late October and fiscal cliff-related cutbacks in business spending.

Wall Street ignored the data as attention remained focused on the developments in Washington surrounding the fiscal cliff.

Though the employment gauge in the Chicago ISM survey fell to a three-year low in December, look for a rebound given the strength in new orders. The pending home sales report pointed to a strengthening in the housing market recovery. Contracts were up 9.8 percent in the 12 months through November.

The housing market has turned the corner after a dramatic collapse, which dragged the economy through its worst recession since the Great Depression of the 1930s. Home sales and prices are rising, encouraging builders to undertake new construction projects. Home resale contracts were up in three of the country's four regions. They were unchanged in the South.