MarketView for January 29

Summary 

The month started out so beautifully and then it seems everything began to fall apart. The final score was that once again the Dow Jones industrial average holds onto its record of not having been up in January since 2007. For the month of January the blue chip index was down 3.5%. The S&P 500 was down 3.7% falling to a three month low. Meanwhile, share prices fell on Friday, as worries about fiscal turmoil in Europe and a drop in technology stocks pushed the S&P 500 to its worst monthly decline since February 2009.

Uncertainty about the fiscal stability of Greece, Portugal and Spain had the day’s early gains quickly evaporating, even as Greek and European Union officials said there was no chance of a Greek default or EU bailout. Nonetheless, the major indexes initially rose more than 1 percent after a host of reports had the economy growing at a much stronger-than-expected pace during the fourth quarter and pointed to continued improvement in the first quarter.

However, the market lost ground by midday in a selloff of technology bellwethers, such as Apple, Microsoft and IBM. Shares of Apple lost 3.6 percent to $192.12 and ranked as the heaviest weight on the Nasdaq, while Microsoft's stock fell 3.4 percent to $28.18. IBM slipped 1.1 percent to $122.39. The PHLX Semiconductor index .SOXX dropped 3.4 percent, weighed down by a soft profit forecast from flash memory maker SanDisk, which closed down 11.7 percent to $25.42.

The recent sell-off has seen the S&P 500 tumble 6.7 percent in the last eight trading sessions. For the week, the Dow lost 1.1 percent, the S&P 500 fell 1.7 percent and the Nasdaq lost 2.6 percent.

Big manufacturers, including Boeing, as well as the energy and materials sectors fell, weighing on both the Dow and the S&P 500 after Honeywell set a first-quarter profit target that fell short of Street expectations. Boeing closed down 3.1 percent to $60.60, while Honeywell lost 3 percent to $38.64.

GDP UP 5.7 Percent

The economy grew at its fastest pace in more than six years during the fourth quarter, surprising economists, as businesses curbed their aggressive cut in stocks and stepped up spending. The robust growth pointed to a sustainable recovery in a crucial period before government stimulus plans run out and was good news for an administration amid political difficulties.

According to a report by the Commerce Department, gross domestic product expanded at a 5.7 percent annual rate. It was a strong end to a year in which the economy shrank by 2.4 percent -- the worst performance since 1946.

While much of the growth resulted from companies' drawing down inventories more slowly than they did earlier in the year rather than from a surge in domestic demand, economists said it was still a positive report.

Getting the economy on a sustainable growth track remains one of the key challenges facing President Barack Obama, who on Wednesday outlined measures to create jobs and nurture the recovery. The government will release its closely watched employment report for January next Friday. The economic picture was further brightened by a jump in Midwest business activity in January to its highest level in four years, while consumer confidence hit a two-year high.

Economists said they expected the lift from inventories to fade over time, with economic growth moderating in the second half of the year. The slowing rate of inventory reduction in the fourth compared to the third quarter lifted GDP by nearly 3.4 percentage points, the biggest contribution inventories have made to GDP growth since the fourth quarter of 1987. When businesses sell off inventories, there is less of a need to step up production and it weighs on GDP. With the liquidation rate slowing, GDP was boosted.

However, even with inventories stripped out, the economy expanded at an annual rate of 2.2 percent, accelerating from the 1.5 percent increase in the third quarter. That reflected relatively strong performance from other segments of the economy, particularly business investment. Still, this measure of final demand is meager compared with most normal recoveries, implying the Federal Reserve can bide its time before raising interest rates.

Consumer spending increased at a 2 percent annual rate, contributing 1.44 percentage points to GDP. In the third quarter, consumer spending had risen at a 2.8 percent pace, supported by the government's "cash for clunkers" program.

Business investment grew at 2.9 percent rate, the first increase since the second quarter of 2008, as the drag from the troubled commercial real estate was offset by robust spending on equipment and software.

Third-quarter growth was put at 2.2 percent after an earlier estimate of 3.5 percent.

The growth of spending on new home construction braked sharply in the fourth quarter to an annual rate of 5.7 percent from an 18.9 percent pace in the third quarter.

Home building has received a lift from a popular tax credit for first-time buyers, but recent data have hinted at some weakness. Export growth outpaced imports, narrowing the U.S. trade gap and adding half a percentage point to GDP growth in the last quarter.