MarketView for January 7

 

 

Summary

 

Stocks fell on Friday after a court ruling in a key foreclosure case prompted investors to pull out of bank stocks, adding to weakness after a lackluster jobs report. Even with the decline, however, the S&P 500 and Dow recorded their sixth straight week of advances. The market has proved resilient despite expectations that stocks were due for a pullback. The S&P 500 found support at its 14-day moving average, which is around 1,262. The index briefly broke below that before popping back up.

 

Wells Fargo and US Bancorp lost a ruling by Massachusetts' top court, which said the banks failed to show they held the mortgages at the time they foreclosed. The court decision is the latest on the validity of foreclosures conducted without full documentation, and the ongoing mortgage fiasco could prove costly for the banks. The news sent the markets lower. Wells Fargo closed down 2 percent at $31.50, while US Bancorp ended the day down 0.8 percent at $25.09.

 

For the week, the S&P 500 rose 1.1 percent, the Dow Jones industrial average was up 0.8 percent, while the Nasdaq was up 1.9 percent.

 

The Street treaded lightly after the employment report, which showed non-farm payrolls rose a less-than-expected 103,000. However, overall employment for October and November was revised upward to show 70,000 more job gains than previously reported.

 

The Labor Department report showed a surprisingly large number of people gave up searching for work, tempering the positive news of a big drop in the unemployment rate.

 

The mortgage issue has been overhanging banks, prompting an uproar last year that led lenders such as Bank of America, JPMorgan Chase and Ally Financial to temporarily stop seizing homes.

 

On the upside, the energy sector capped declines as Diamond Offshore rose 4.9 percent to $70.57 after Goldman Sachs upgraded the shares. Goldman also upgraded Baker Hughes, sending its shares up 3.2 percent to close at $56.60.

 

On Capitol Hill, Federal Reserve Chairman Ben Bernanke sounded cautiously more upbeat than in the recent past, citing improvements in consumer spending and a drop in claims for jobless benefits as hopeful signs for the recovery.

 

About 8.72 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 8.47 billion. Volume has been strong throughout the first trading week of the year.

 

Unemployment Rate Falls to 9.4 Percent

 

After the ADP report on Wednesday stating that private employers added 297,000 in December, the largest gain on ADP records since the year 2000, Wall Street was looking for some exceptional job growth in Friday’s report by the Labor Department. Problem is that it did not happen. Employers hired far fewer workers than expected in December, indicating that the economy is certainly not out of the woods at the moment. Nonetheless, the unemployment rate fell to a more than 1-1/2 year low, coming in at 9.4 percent.

 

Non-farm payrolls increased 103,000, below economists' expectations for 175,000. Private hiring rose 113,000, while government employment fell 10,000. However, overall employment for October and November was revised to show 70,000 more job gains than previously reported. The unemployment rate fell to 9.4 percent, the lowest since May 2009, from 9.8 percent in November.

 

The separate household survey from which the unemployment rate is derived showed both an increase in employment and a decline in the labor force, which combined to lead to the biggest drop in the jobless rate since April 1998. The disappointing jobs growth figure suggests that the Federal Reserve will likely stay the course with its effort to support the economy with the purchase of $600 billion in government bonds.

 

Although the labor market recovery remains very slow, the broader economy is showing signs of strengthening, with data on consumer spending and manufacturing improving.

 

The relatively upbeat data had led to calls for the U.S. central bank to scale back its widely criticized government bond-purchasing program aimed at keeping interest rates low to boost demand. Some policymakers indicated in December they had a "fairly high" threshold for curtailing the stimulus program.

 

Employment gains in December were led by the private services sector, which saw payrolls rising 115,000 after gaining 84,000 in November. Retail jobs increased 12,000 after a surprise 19,400 slump in November when retailers reported their best sales in years.

 

Temporary hiring, seen as a harbinger of permanent employment, increased 15,900 after 31,100 in November. The goods-producing sector shed 2,000 jobs in December after losing 5,000 in November, but manufacturing payrolls rose 10,000. Construction employment fell 16,000 after slipping 2,000 in November. The average work week was steady at 34.3 hours. Average hourly earnings increased three cents in December.

 

Fed Chairman Upbeat

 

The economy may finally be hitting its stride even if growth remains too weak to put a real dent in the nation's jobless rate, Federal Reserve Chairman Ben Bernanke said on Friday. Although he provided no concrete direction with regard to his plans for monetary policy, Bernanke did reference improvements in consumer spending and a drop in jobless benefit claims as hopeful signs a languid recovery was perking up.

 

"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," he said in his first testimony to Congress since the Fed launched its controversial plan to buy an extra $600 billion in government bonds.

 

Just a month ago, in an interview on the CBS program "60 Minutes," Bernanke voiced a degree of trepidation about the economy's rebound. Bernanke’s remarks on Friday were made public just an hour after the government reported the economy generated a disappointing 103,000 jobs in December.

 

Bernanke, who said it would take four to five years for the labor market to get back to normal, showed no inclination toward cutting short the Fed's bond purchase program. But he also offered no hints of further buying beyond the program's June deadline.

 

Financial markets, focused on the new jobs data, showed little reaction to Bernanke's remarks.

 

Echoing Bernanke, Fed Board Governor Elizabeth Duke said in a separate speech that the recovery appeared to be gathering steam, but both hiring and inflation would likely remain subdued. "I am encouraged by signs that the recovery may have gained traction recently," Duke said.

 

The improvement in the economic backdrop has prompted Wall Street investors to begin pondering a possible reversal in Fed policy as early as the end of this year. In the summer, few expected anything in the way of monetary tightening until at least 2012.

 

In his testimony to the Senate Budget Committee, Bernanke defended the Fed's bond purchases by highlighting the weakness in employment and what he saw as the risks associated with very low rates of inflation.

 

"Persistently high unemployment, by damping household income and confidence, could threaten the strength and sustainability of the recovery," Bernanke said.

 

"Very low inflation increases the risk that new adverse shocks could push the economy into deflation. Deflation induced by economic slack can lead to extended periods of poor economic performance."

 

Many conservative Republicans have ridiculed the bond-buying plan as risking inflation. The tone of the hearing, however, was largely respectful, although Republican Sen. Jim Sessions of Alabama said he did not share Bernanke's confidence that the central bank would be able to withdraw its stimulus in time.

 

Addressing the budget deficit, a hot topic in Washington now that newly empowered Republicans are pushing for spending cuts, Bernanke urged lawmakers to take a go-slow approach. "Fiscal policymakers will need to continue to take into account the low level of economic activity and the still-fragile nature of the economic recovery," he said. At the same time, Bernanke came down hard on what he described as an unsustainable long-term fiscal path.

 

"Doing nothing will not be an option indefinitely," Bernanke said. "Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt, and, potentially, to broader financial turmoil."

 

He threw his support behind proposals to reform the tax code, saying lower rates and fewer loopholes were needed to make the system more efficient.