MarketView for December 23

Summary  

The major equity indexes were higher again on Monday, with the Dow Jones Industrial Average and S&P 500 indexes advancing to all-time highs as a deal by Apple to supply China Mobile with the IPhone 5 added momentum to the entire technology sector.

This week, volume is expected to be thin, with many market participants out for the Christmas holiday. Equity markets will close early on Tuesday and will be closed all of Wednesday. The light volume could amplify market volatility.

Apple ended the day up 3.8 percent to close at $570.09, its largest percentage gain in three months, after the company indicated on Sunday it had signed a long-awaited agreement with China Mobile to sell iPhones through the world's biggest network of mobile phone users, a deal which could add billions of dollars to its revenue.

Apple's gains helped power the S&P technology sector index to a gain of 1.5 percent, making it the best performer among the 10 major S&P sectors. The stock's massive market capitalization helped lift both the S&P 500 and the Nasdaq. U.S.-listed shares of China Mobile rose 1.6 percent to close at $52.47.

Both the Nasdaq and the S&P 500 received a boost from Facebook, which ended the day up 4.8 percent to end at a record $57.77, in the social networking company's first day of trading as an S&P 500 component. Facebook also set an all-time intraday high of $58.32 during Monday's session.

The day’s rally was fueled by strong economic data and the Fed's decision to begin trimming its stimulus program next month, which removed a major source of uncertainty for the market. The Fed also said its key interest rate would stay at rock bottom longer than previously promised. The S&P 500 is up 28.2 percent this year, largely due to the Fed's stimulus measures, and is on track for its best year since 1997.

In the latest economic data, consumer sentiment hit a five-month high heading into the end of the year, and spending notched its strongest month since the summer, the latest signs of sustained vigor in the economy that are increasing hopes of a strong 2014.

Retail stocks will continue to garner attention in the final shopping days leading up to Christmas. In a sign that this season may be a difficult one for the sector, U.S. consumers shopped less during the final weekend before Christmas despite deeper discounts, according to analytics firm RetailNext.

Target is encountering difficulties in the wake of a massive data breach. The Wall Street Journal reported that the retailer suffered reduced customer traffic over the weekend, which is one of the busiest of the year. Target ended the day down1 percent to close at $61.88.

Volume was light, with approximately 4.68 billion shares changing hands on the major equity exchanges, a number that was well below the 6.49 billion share average so far this month, according to data from BATS Global Markets.

Consumer Spending Up Sharply

The Commerce Department reported Monday morning that consumer spending chalked up its largest rise in five months during November, one more indication of sustained strength in the economy as the year winds down. According to the report, consumer spending was up 0.5 percent after advancing by a revised 0.4 percent in October. It was the seventh straight month of increases and matched economists' expectations. October had been previously reported to have increased 0.3 percent in October.

When adjusted for inflation, consumer spending increased 0.5 percent in November after rising 0.4 percent in October. November's increase in so-called real consumer spending was the largest since February 2012. This indicates that consumer spending in the fourth quarter probably accelerated from the third quarter's 2 percent annual rate. Spending is being bolstered by improving household balance sheets, thanks to a rising stock market and house prices.

The report added to other positive economic data, such as employment and industrial production, in suggesting that the economy retained some of its third-quarter momentum in the lead-up to the end of the year and was poised for faster growth in 2014.

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The current data also fits in with Federal Reserve's upbeat view on the economy. Specifically, that the economy grew at a 4.1 percent clip in the July-September period, the fastest pace in nearly two years, after expanding at a 2.5 percent rate in the second quarter.

International Monetary Fund managing director Christine Lagarde said on Sunday the international lender would raise its growth forecast for the world's largest economy next year. The IMF forecast in October that the U.S. economy would expand 2.6 percent in 2014.

Despite the signs of strength in the economy, inflation remains benign. A price index for consumer spending was unchanged for a second straight month. Over the past 12 months, prices rose 0.9 percent. The index had gained 0.7 percent in October.

Excluding food and energy, the price index for consumer spending rose 0.1 percent, rising by the same margin for a fifth straight month. Core prices were up 1.1 percent from a year ago, after rising by the same margin in October.

Both inflation measures continue to trend below the Fed's 2 percent target, which would suggest the U.S. central bank could keep interest rates near zero for a while, even as it reduces its monthly bond purchases.

Income rose 0.2 percent, rebounding from a 0.1 percent dip in October. With spending outpacing income growth, the saving rate - the percentage of disposable income households are socking away - fell to a nine-month low of 4.2 percent.

Consumer Sentiment Higher

Consumer sentiment rose to its strongest in five months during December as Americans' outlook on the economy and job prospects improved. The final reading on the Thomson Reuters/University of Michigan's overall index of consumer sentiment hit 82.5 for December, up from the 75.1 posted in November. This was the highest reading for the index since July, though it was slightly under expectations for a reading of 83.

The survey's barometer of current economic conditions jumped to 98.6 in December, up from both the preliminary read of 97.9 as well as the November reading of 88. The survey's gauge of consumer expectations rose from 66.8 in November to 72.1, though this was below the 75.0 forecast as well as the initial read of 72.7.

The current conditions index was at its highest since July, while the consumer expectations index was at its highest since August. The one-year inflation expectation was 3 percent, above the 2.9 percent November figure, while the survey's five-to-10-year inflation outlook dipped to 2.7 percent from 2.9 percent last month.