MarketView for January 3

 

 

Summary

 

It was mostly an uneventful day on Friday as Wall Street digested comments from Federal Reserve officials that raised questions about how quickly the central bank will end its stimulus program. The S&P's slight decline marked the first time since 2005 that the benchmark index started a year with two straight negative sessions. For the week, the Dow fell less than 0.1 percent while both the S&P and Nasdaq lost 0.6 percent.

 

The markets began the day slightly higher but subsequently pared gains after Philadelphia Fed President Charles Plosser said the Fed faced "immense" challenges now that it had reduced bond-buying and that it needed to be cognizant of a potential rapid rise in future inflation.

 

Fed Chairman Ben Bernanke said that the central bank was no less committed to accommodative monetary policies despite the recent announcement that it would slow its stimulus program. He also said the economic recovery "clearly remains incomplete.

 

Equities briefly turned positive following the comments before returning to breakeven territory.

 

General Motors fell 3.4 percent to close at $39.57, one of the S&P 500's largest losers, after the automaker reported lower December sales. Ford closed out the day up 0.5 percent at $15.51.

 

Crude oil fell 1.3 percent, bringing its 2014 year-to-date losses to 4.3 percent, a result that sent airline stocks higher on Friday. Delta rose 5.5 percent to $29.23, making it the S&P 500 index's largest gainer, while Southwest rose 2.9 percent to end the day at $19.42.

 

FireEye closed up 39 percent to $57.02 after the cybersecurity company acquired Mandiant, the computer forensics specialist best known for unveiling a secretive Chinese military unit believed to be behind a series of hacking attacks on U.S. companies.

 

Twitter closed out the day up 2.2 percent to $69. Shares in the social media company began the New Year with a gain of more than 8 percent.

 

Volatility was exacerbated by light trading volume, with about 4.61 billion shares changing hands on the major equity exchanges, according to BATS exchange data, well below average, with many market participants out in the wake of the New Year's holiday, as well as a snowstorm in the northeast.

 

Fed Stands Resolute In Its Goals

 

The Federal Reserve is no less committed to highly accommodative policy now that is has trimmed its bond-buying stimulus, Ben Bernanke said on Friday in what could be his last speech as Fed chairman.

 

Bernanke, who steps down as head of the U.S. central bank at month's end, gave an upbeat assessment of the U.S. economy in coming quarters. But he tempered the good news in housing, finance and fiscal policies by repeating that the overall recovery "clearly remains incomplete" in the United States.

 

In what came as a surprise to some, the Fed decided last month to cut its asset-purchase program, known as quantitative easing or QE, by $10 billion to $75 billion per month. It cited a stronger job market and economic growth in its landmark decision, which amounted to the beginning of the end of the largest monetary policy experiment ever.

 

But that decision "did not indicate any diminution of (the Fed's) commitment to maintain a highly accommodative monetary policy for as long as needed," Bernanke said at a American Economic Association forum in a snow-swept Philadelphia.

 

"Rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012," he said according to prepared remarks.

 

To recover from the deep 2007-2009 recession, the Fed has held interest rates near zero since late 2008. It also has quadrupled the size of its balance sheet to around $4 trillion through three rounds of massive bond purchases aimed at holding down longer-term borrowing costs.

 

The Fed's extraordinary money-printing has helped drive stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets last year as investors anticipated an end to the easing.

 

Looking into the years ahead, Bernanke said the central bank has the tools - including adjusting the rate on excess bank reserves and so-called reverse repurchase agreements, or repos - to return to a normal policy stance without resorting to asset sales.

 

"It is possible, however, that some specific aspects of the Federal Reserve's operating framework will change," he said.

 

On the economy, Bernanke noted unemployment remains elevated at 7 percent, and said the number of long-term unemployed Americans "remains unusually high."

 

However, Tthe combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters," he said.

 

"Of course, if the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts."

 

Last month, Bernanke, who is set to be succeeded by Fed Vice Chair Janet Yellen, said the purchases would likely be cut at a "measured" pace through much of this year if job gains continued as expected, with the program fully shuttered by late-2014.

 

Auto Sales Miss

 

The top four automakers in the U.S. market missed December sales expectations, but 2013 will still easily be the best year for the industry since before the recession. General Motors said that the industry will have December sales at a 15.6 million-vehicle annualized selling rate, well below the 16 million vehicles expected by the Street.

 

The late December holiday season is generally one of the heaviest sales periods at U.S. auto dealerships. However, it appears that sales that may have occurred in December were pulled ahead to November because of a late-month, four-day Thanksgiving weekend.

 

December auto sales were also hampered by snowy and icy weather over parts of the country late in the month, said Chrysler spokesman Ralph Kisiel. Each month, auto sales are seen as an early indicator of consumer spending. For all of 2013, auto sales are expected to finish near 15.6 million vehicles, up about 8 percent.

 

That would be the best sales year since pre-recession 2007, when 16.1 million vehicles were sold in the U.S. market. At the height of the recession in 2009 sales fell to 10.4 million.

 

GM's sales fell 6 percent, to 230,157 new vehicles, below analysts' expectations of a slight sales gain. Sales of GM's Chevrolet Silverado pickup truck fell 16 percent in the month.

 

Ford's sales rose 2 percent, to 218,058, also below analysts' expectations. Its F-Series pickup truck, the best-selling model in North America, had an 8 percent sales gain in December.

 

Toyota's U.S. December sales fell 1.7 percent to 190,843 vehicles, versus expectations of a slight gain.

 

Chrysler on Friday reported a 6 percent gain last month in its U.S. auto sales, to 161,007 vehicles. That was the automaker's best December since 2007, but still narrowly missed analyst expectations. Ram pickup truck sales rose 17 percent. Jeep sales rose 34 percent in the month, led by the new Cherokee, which sold four times as well in December as the vehicle it replaced, the Jeep Liberty, did a year ago. Chrysler expects the industry to show a December annualized selling rate of 15.8 million vehicles.

 

The top four automakers by sales are, in order, GM, Ford, Toyota Motor Corp and Chrysler. GM's sales for the year rose 7 percent to 2.8 million vehicles, and Ford's U.S. annual sales of 2.5 million vehicles rose 11 percent. For the year, Chrysler's U.S. sales rose 9 percent to 1.8 million vehicles. Toyota's annual U.S. sales rose 7 percent to 2.2 million vehicles.

 

While some economists and analysts expect 2014 sales to rise to between 16 million and 16.5 million vehicles, there is growing concern that competition will intensify, leading to higher incentives and lower profit for companies.

 

Research firm TrueCar.com said vehicle transaction prices fell by an average of $200 per vehicle in December, or 0.6 percent, over last year while incentives were up $103 per vehicle, or 4 percent.

 

Chrysler is majority-owned by Italy's Fiat SpA. Earlier this week, the two companies announced that Fiat would buy the remainder of Chrysler that is currently owned by a United Auto Workers healthcare trust, for $4.35 billion. That deal is expected to close by January 20.