MarketView for December 12

Summary  

The major equity indexes were down again on Thursday as retail sales rose solidly in November, adding to signs the economy is strong enough for the Federal Reserve to begin reducing the pace of monetary stimulus. Profit taking also played a part in the market’s decline on Thursday, with investors locking in gains from this year's rally. The S&P 500 is set to end the year with its strongest performance in more than a decade.

Facebook ended the day at its highest point since October 25, a day after it was selected to join the S&P 500 index. The change becomes effective after the close on December 20. Facebook ended the day up 5 percent to close at $51.83.

Many market participants have expected the Fed to announce a cut in its $85 billion a month in bond purchases in March, but that timeline may have shortened after Friday's better-than-expected November payrolls report and Tuesday's initial agreement in Washington on a bipartisan budget.

Other markets also reacted to the perception of a shorter timeline for the Fed's tapering of its bond-buying stimulus. The dollar rose 0.4 percent against a basket of major currencies and spot gold slid 2 percent. The Fed's policy-setting committee is scheduled to meet for the last time this year on Tuesday and Wednesday.

The market is expected to be more volatile ahead of the Fed meeting. The CBOE Volatility Index ended the day on Thursday at 15.54, its highest point since October 15, and the options market showed a trader purchased 40,000 call options at the 22 strike. The VIX has not traded above 22 this year, though it brushed against that level in June in the wake of a Fed announcement.

The Labor Department reported the highest level of claims for unemployment insurance in a year although the number was generally ignored as many believed the figures were skewed by adjustments for the season and other factors.

Lululemon fell 11.7 percent to $60.39 after the yoga apparel company said fewer customers are visiting its stores and supply-chain issues are hitting sales in the crucial fourth quarter.

Investors also dealt with a flurry of initial public offerings, including Hilton Worldwide Holdings, which rose 7.5 percent to close at $21.50 in its first day of trading. The IPO was priced at $20 a share. Aramark Holdings staged a more impressive debut, up 13.5 percent at $22.70 after going public at $20 per share.

Shares of J.C. Penney were up 0.8 percent to end the day at $8.55. CEO Mike Ullman told Reuters that the department store chain is eliminating or trimming some high-profile brands introduced by former CEO Ron Johnson. Penney intends to use the floor space for its more profitable private-label brands.

Southwest Airlines was the S&P 500's largest percentage advancer, gaining 4.6 percent to $18.79 after Bank of America Merrill Lynch raised its rating on the airline operator's stock to "buy."

About 6.2 billion shares changed hands on the major equity exchanges, a number that was slightly ahead of the 6.1 billion share average so far this month, according to data from BATS Global Markets.

Economic Data is Mixed

Retail sales rose solidly in November, adding to signs of a strengthening economy that could draw the Federal Reserve closer to reducing the pace of monetary stimulus. However, the upbeat picture was clouded somewhat by other data on Thursday indicating the largest increase in a year for new unemployment insurance claims. The question is whether that report was skewed by the late Thanksgiving, among other factors.

According to the Commerce Department, retail sales increased 0.7 percent last month representing purchases of a wide range of products ranging from automobiles to electronics. November's increase was the largest in five months and followed a 0.6 percent increase during October.

The so-called core sales, which strip out automobiles, food services, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, rose 0.5 percent after gaining 0.7 percent in October.

The core sales gain was consistent with consumer spending rising at an annualized rate of at least 3.5 percent in the fourth quarter, economists said. That would be a big step-up from the third quarter's 1.4 percent pace.

The relatively strong sales last month defied industry expectations of a slow holiday season. Reports early this month suggested shoppers spent less during the Thanksgiving weekend, the traditional start of the holiday shopping season.

Middle-income shoppers have been careful in their spending, waiting for the right promotions and in many cases shifting a lot of their spending to big-ticket items like their cars or home repairs and away from items such as clothing.

Retail chains, such as Home Depot and Lowe's, reported far better sales gains than retailers such as Macy's or Target.

Consumer spending is being supported by solid job gains and steady income increases, and could help shield the economy in the fourth quarter from an expected effort by businesses to reduce inventories that piled up during the July-September quarter.

Meanwhile, the fourth-quarter consensus GDP growth estimates are now abou half a percentage point to as high as a 2.2 percent annual rate.

Economists also said a second report from the Commerce Department suggested businesses were not being as aggressive in selling off inventories as had been expected, which could mean any correction spills into the New Year.

Inventories were up 0.7 percent in October, the largest gain in nine months, after a 0.6 percent rise in September.

Lower gasoline prices are also helping, though they were a drag on the retail sales figures, which are not adjusted for inflation.

The firming growth tone was tempered somewhat by a report from the Labor Department that showed initial claims for state unemployment benefits surged 68,000 to a seasonally adjusted 368,000 last week.

That was the largest weekly increase since November 2012 and surpassed economists' expectations for a rise to only 320,000. However, the four-week moving average for new claims, which irons out week-to-week volatility, rose only 6,000, suggesting that a recent strengthening of the jobs market remains intact. Nonfarm payrolls increased strongly in October and November, and the jobless rate hit a five-year low of 7.0 percent.

The steady stream of fairly upbeat data should give the Fed cover to start cutting back its monthly $85 billion bond buying program soon, and could fuel some speculation a move could come as early as the central bank's meeting on Tuesday and Wednesday.