MarketView for January 4

Summary

Yesterday’s darling is today’s outcast and on Tuesday commodities were no exception. Commodity based shares, a much sought after investment just a few short weeks ago were pummeled, while concerns over a decline in supermarket profits hit food retailers, sent the S&P 500 and Nasdaq indexes lower. Meanwhile, copper, oil and other commodities saw their prices decline from previous multiyear highs.

Trading volume was strong for a second day with about 8.38 billion shares trading on the three major exchanges. For comparison purposes, that number was just below last year's approximate daily volume of 8.47 billion shares.

One possible reason being given for some of Tuesday’s volatility is that many portfolios are being reorganized as part of a normal start of the New Year rebalancing. Moreover, the opinion for the moment seems to be that the rising attractiveness of equities is continuing.

Shares of grocery retailer Supervalu fell sharply, making it the top percentage decliner on the S&P 500 after Morgan Stanley wrote that investors should cut their holdings in the stock, saying rising food costs will crimp margins. Safeway and Whole Foods also saw their shares drop in value during the day. Shares of Supervalu were down 6.3 percent to $9.00. Safeway closed down 3.8 percent to $21.64, as Whole Foods fell 3.4 percent to close at $49.04.

Both the S&P and Nasdaq managed to contain much of their downhill slide, keeping losses to a modest minimum, while the Dow Jones industrial average managed a slight gain following minutes from the Federal Reserve's December policy meeting indicating that the Fed felt the economic recovery was still weak enough to warrant monetary support in the form of bond purchases through its current QE2 program.

The market was also supported by strength in defensive shares, including the utilities and telecom sectors. That defensive tone was a plus for the large blue chip companies, which in turn sent the Dow into positive territory.

It is interesting to note that although many of the Street’s analysts are projecting another year of gains for the S&P 500, Morgan Stanley offered a contrarian view, forecasting the S&P 500 would end the year lower.

Factory Orders Rise

According to a report released by the Commerce Department on Tuesday, new factory orders rose 0.7 percent in November after dropping a revised 0.7 percent in October.  If you exclude transportation then orders increased 2.4 percent, the highest since March, after a 0.1 percent gain the prior month. The numbers reaffirm that the economic recovery continues along the desired path, i.e., one of rising economic growth.

Unfilled orders increased 0.6 percent in November after rising 0.7 percent the prior month. Shipments increased 0.8 percent, rising for a third consecutive month, while inventories gained 0.8 percent after rising 1.1 percent in October.

At the same time, the Commerce Department revised durable goods orders for November to show a much smaller 0.3 percent decline, rather than the previously reported 1.3 drop. Excluding transportation, orders for durable goods increased a bigger 3.6 percent in November instead of 2.4 percent.

Orders for non-defense capital goods excluding aircraft, seen as a measure of business confidence, increased 2.6 percent after 3.2 percent decline in October.

Manufacturing has been the star performer during the economic recovery and is apparently continuing to expand in an effort to meet a growing demand from consumers and businesses. The current thought on Wall Street is that the economy likely grew at an annual pace of 3 to 3.5 percent in the fourth quarter.

The financial markets were little changed as optimism over the economic outlook was offset by a decline in consumer stocks. U.S. Treasury debt prices edged higher The euro climbed to a three-week high against the dollar.

Fed Maintains Economy Needs Help

It became clear from the minutes of its December meeting that the Fed is of the position that the economy continues to need help, despite signs of strength. It would appear that the Fed has little or no impetus to reduce its bond-buying plans.

Some Fed officials indicated a "fairly high" threshold for reconsidering the $600 billion in purchases first announced back in November, while others thought more time was needed before any such re-evaluation. In fact, the December 14 meeting minutes noted that "members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program."

The rather dovish tone of the minutes suggested anyone thinking the central bank might curtail its controversial bond-buying plans, known in the markets as the second round of quantitative easing or QE2, may be getting ahead of themselves.

Although many on Wall Street have kept busy revising up their forecasts for economic growth in recent weeks on data showing business activity and consumer spending picking up steam, the Fed's policy-setting panel was much less sanguine.

A key reason is that the economy, having emerged from its deepest recession in the summer of 2009, has since expanded in anything but a steady upward trend. Gross domestic product rose at a 2.6 percent annual rate in the third quarter, a pace still seen as too low to bring down the country's 9.8 percent jobless rate.

The minutes did suggest the central bank is counting on a short-term boost to the economy from the recent tax cut deal between President Barack Obama and Republicans in Congress. However, the minutes were also clear on the point that the Fed’s policymakers remain concerned regarding the risks to growth, including anemic hiring and a battered housing sector, which has been flirting with a renewed slump.

"Even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment," the minutes said.

"The recovery is subject to some downside risks," the minutes said, citing housing and debt troubles in Europe as potential trouble spots. The Fed also noted that while consumer spending had picked up, much of it was concentrated among richer Americans.

"There are indications that retail spending by middle- and lower-income households had risen less than spending by high-income households, suggestive of ongoing financial pressures on those of more modest means," the minutes said.

Meeting participants generally thought inflation would remain below levels consistent with the Fed's mandate for "some time." The minutes said Fed staff had revised up their near-term forecasts but did not believe growth prospects were any firmer over a longer horizon.