MarketView for December 5

Summary

The major equity indexes fell once again on Thursday, with the Dow Jones Industrial Average and the S&P 500 indexes down for a fifth straight session after a round of mixed economic data left traders guessing as to when the Federal Reserve would begin to slow its stimulus program. The Dow and the S&P 500 are in their worst stretch since September. However, the moves have been slight, with the S&P 500 down about 1.2 percent over the period.

Gross domestic product grew at an annualized rate of 3.6 percent in the third quarter, the fastest pace since the first quarter of 2012 and faster than the 3 percent rate that had been expected. Another report showed that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week in a hopeful sign for the labor market - a day ahead of the November nonfarm payrolls report.

Traders have been trying to second-guess how the Fed views strong data and whether the numbers are strong enough for the central bank to slow its $85 billion-a-month bond-buying program, which it said it would do when certain economic metrics meet its targets.

The Dow and the S&P 500 are on track to post their first negative week in nine. Wall Street's recent rally, which took the Dow and the S&P 500 to all-time highs, came mostly on expectations that the Fed would hold steady with its stimulus. The three major U.S. stock indexes have each climbed more than 20 percent this year.

Apple ended the day up 0.5 percent to $567.90 after China Mobile said it was still negotiating to offer iPhones on its network. A media report had earlier said that the long-awaited agreement had been reached. Earlier, Apple hit a 52-week high just above $575.

At the same time, Microsoft was down 2.4 percent to close at $38 in heavy volume. It was the largest decliner, in terms of points, on the Nasdaq 100 and outweighed Apple's rise.

J.C. Penney fell 8.4 percent to $8.85 after Morgan Stanley reiterated its "underweight" rating on the stock and said November's 10 percent sales growth was not enough to change the company's outlook. Other major retailers posted disappointing sales for November as cautious shoppers pinched their pennies at the start of the holiday season.

Costco fell 1.6 percent to $120.95 after the warehouse club chain said sales at stores open at least a year rose 2 percent, below the 3.3 percent increase that analysts were expecting. Yet, the stock of Dollar General was up 6.1 percent to $59.81 and ranked as the S&P 500's best performer after the discount retailer posted third-quarter earnings and said same-store sales rose 4.4 percent in the same period.

Approximately 5.1 billion shares changed hands on the major exchanges on Thursday, according to BATS exchange data.

Latest GDP Numbers Exceed Expectations

The economy grew at a faster rate than initially estimated in the third quarter. According to the Commerce Department, gross domestic product grew at a 3.6 percent annual rate instead of the 2.8 percent pace reported a month ago. It was the largest gain since the first quarter of 2012, but inventories accounted for almost half of the increase in growth. At the same time, weak demand and a pile-up in business inventories buoyed the case for the Federal Reserve to keep up its bond-buying stimulus for now.

Businesses accumulated $116.5 billion worth of inventories during the quarter, the most since the first quarter of 1998. The large build-up suggested firms were surprised by a lack of demand. Domestic demand rose at just a 1.8 percent rate, instead of the 2.1 percent the government reported last month.

The strong inventory accumulation in the face of slowing domestic demand means businesses will likely need to draw down on stocks, which would weigh on GDP growth this quarter. Orders for manufactured goods fell 0.9 percent in October, a separate report showed.

Fourth quarter growth estimates are already on the low side, with a 16-day shutdown of the government in October expected to shave off as much as half a percentage point from GDP. Therefore there is concern that the inventory bulge posed a downside risk to their forecasts. Fourth-quarter economic growth estimates are currently below a 2 percent rate.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down to a 1.4 percent rate, the lowest since the fourth quarter of 2009. It had previously been estimated to have increased at a 1.5 percent pace.

A sluggish start to the holiday shopping season offered another reason for caution on the economy's near-term prospects. Several big U.S. retailers reported disappointing November sales, with some relying on bargains to lure shoppers.

Nonetheless, recent data have also offered reason for optimism. A report from the Labor Department indicated that initial claims for state unemployment benefits fell by 23,000 claims to a seasonally adjusted 298,000 claims last week. It was the third straight weekly drop and confounded economists' expectations for an increase to 325,000.

The report was the latest suggestion the labor market is gaining momentum. A report on Friday is expected to show that nonfarm payrolls increased 180,000 last month and the unemployment rate was down to 7.2 percent from 7.3 percent.

The Commerce Department also said that corporate profits after tax increased at a 2.6 percent pace in the third quarter, slowing from the prior quarter's 3.5 percent pace.

Against this backdrop, the thinking is now that the Fed is likely to remain cautious regarding trimming its asset purchases, even though recent signs on the labor market, including data on Thursday that showed a large decline in new claims for jobless benefits, thereby implying that the economy is strengthening.

"I am not prepared to interpret the revised third quarter number as an indication that the economy is on a much stronger track," Atlanta Federal Reserve Bank President Dennis Lockhart, a policy centrist at the central bank, told reporters. "I think we're still on that relatively moderate growth track."

Fed officials have been buying $85 billion in bonds each month to keep borrowing costs low. Most economists do not expect them to taper their purchases until March, although some speculate they could move at their next meeting on December 17-18.

Speculation the central bank might curtail its bond buying soon pushed yields on U.S. government debt to three-month highs. U.S. stocks were trading lower, while the dollar was weaker against a basket of currencies.