MarketView for January 26

Summary 

Stock indexes were slightly negative for the day amidst a churning sea of political and regulatory developments, offsetting solid earnings and improved consumer confidence data. The momentum that sent stock prices higher during the first half of the trading day managed to evaporate as the trading day drew to a close as Wall Street awaited both the Federal Reserve's policy announcement Wednesday at 2:00 PM and President Barack Obama's State of the Union address on Wednesday evening.

The Fed's Open Market Committee began a two-day meeting on Tuesday against the backdrop of a Senate debate over Chairman Ben Bernanke's reconfirmation. The meeting is expected to yield few policy shifts, with a Fed statement on the economy and interest rates expected on Wednesday.

Meanwhile, the Senate is expected to vote this week on confirmation of Bernanke for a second term as Fed chairman. Bernanke has been criticized for the Fed's handling of the financial crisis, but Senate leaders predict he will be confirmed.

After the closing bell, Yahoo Inc reported fourth-quarter earnings in line with Street expectations and forecast first-quarter revenue flat to slightly higher than the year-ago period. Yahoo saw its shares chalk up a 1.9 percent gain to close at $16.30 in after-hours trading.

Verizon Communications was the second largest drag on the Dow Jones industrial average after saying it faced a slower-than-expected recovery. Its shares closed down 1.6 percent at $30.17. Nonetheless, despite a somewhat dreary day on the Street, a number of companies posted positive earnings numbers. For example, Travelers closed up 2.7 percent to $50.23, after the property-casualty insurer posted an earnings number that exceeded Street's projections.

Apple saw its share price gain 1.5 percent to $205.94, a day after reporting strong quarterly results and on growing anticipation over its tablet product launch on Wednesday. The company provided the biggest lift to the Nasdaq, followed by Microsoft, up 0.7 percent to $29.50. Microsoft is scheduled to report results later this week.

Consumer Confidence Jumps Sharply

Consumer confidence in January rose to its highest level in nearly a year and a half. According to the Conference Board, consumer confidence gained ground for the third straight month in January, driven by improved economic conditions.

The Board’s index of consumer attitudes rose to 55.9 in January, the highest reading since September 2008 and up from an upwardly revised 53.6 in December. A decline in job losses in recent months and a resurgent stock market have helped improve consumers' mood as the economy returned to growth last year after the worst economic slump in decades. Yet concerns remain about the sustainability of the recovery after the most severe housing market downturn and highest unemployment in more than a quarter century.

The survey also showed consumers' expectations at their highest level in more than two years. The expectations index rose to 76.5 in January, the highest since October 2007, from December's upwardly revised 75.9.

S&P/Case-Shiller Housing Index Lower

The closely watched Standard & Poor's/Case-Shiller housing indexes released on Tuesday indicated that home prices slipped in November. The S&P composite index of home prices in 20 metropolitan areas edged down 0.2 percent in November and registered a 5.3 percent annual drop.

October prices were revised to show a 0.1 percent dip, after originally having been reported as unchanged. Yet, a home price index from the Federal Housing Finance Agency showed that home prices rose 0.7 percent in November from October.

There is little question that housing sales and prices were likely affected by the originally scheduled November 30 expiration of the government's tax credit for first-time buyers. Since then, the tax credit has been expanded and extended until June.

Rising Likelihood That Bernanke Will Be Confirmed By Senate

Ben Bernanke's prospects for a second term as Federal Reserve chairman moved closer to a successful conclusion on Tuesday as a number of previously undecided senators voiced their support as the chairman’s term moved towards a Sunday expiration date.

The current thinking is that 43 senators will probably support Bernanke, whose four-year term as Fed chief expires on Sunday, with 19 opposing him. Senate Democratic leader Harry Reid said a vote could come on Thursday or Friday.

The growing support suggested Bernanke would survive the unremitting voter anger over the current economic status. Bernanke was in jeopardy of becoming the fall guy, but a push by the White House and Senate allies has slowly coaxed undecided senators into the Fed chairman's column. Nonetheless, the former Princeton University professor looked certain to draw a record number of "no" votes for a nominee tapped to head the U.S. central bank.

Bernanke will have to attract 60 votes in the Democratic-controlled chamber to overcome efforts by some lawmakers to block his nomination. If he clears that procedural hurdle, a simple majority of 51 could confirm him.

Senate Republican leader Mitch McConnell repeated his expectation that Bernanke would be approved with support from both political parties. Senator John Thune, a member of the Republican leadership, said he expected more than 12 Republicans to vote for Bernanke.

If the Senate fails to act in time, Fed Vice Chairman Donald Kohn appears poised to take over leadership of the central bank on an acting basis. Bernanke's confirmation had seemed assured until the Massachusetts election reshaped the political calculus.

Public ire at the financial bailouts the Fed helped lead even as the unemployment rate was climbing into in double digits has made a potent political brew for senators facing re-election in November and has undercut support for Bernanke.

The Fed chief had actively sought to salvage his nomination in meetings with senators, but Tuesday afternoon he turned from politics to policy, chairing a long-planned two-day meeting of Fed officials to plot interest-rate strategy.

While Bernanke, who was first named to the Fed chairmanship by President George W. Bush, has been credited with capably steering the economy through the worst financial storm in decades, he is under fire for the Fed's hands-off regulatory and easy money policies that preceded the meltdown.

A senior Fed official warned that Bernanke's rocky path to confirmation suggests a worrisome attempt to exert political influence over the decisions of the central bank.

"The impulse to use Mr. Bernanke as a political punching bag raises the specter that, instead of doing the right thing, Congress may seek to pressure the Fed to print its way out of this crisis," Dallas Federal Reserve Bank President Richard Fisher wrote in the Wall Street Journal. Fisher said if the Fed were to succumb to pressure to print more money than economically wise, inflation would ensue.

Bernanke became a Fed board member in 2002 and later served as a White House economic adviser before Obama predecessor George W. Bush tapped him to head the central bank as chairman. President Barack Obama selected him for a second term in August, praising him for his efforts to buffer the economy from the financial crisis.