MarketView for January 23

Summary

The major equity indexes were lower on Thursday, with the Dow Jones Industrial Average recording its third consecutive day of losses, as stocks sold off in wake of disappointing manufacturing data in China. Financials and materials stocks were the day's worst losers while telecom services was the only positive sector as investors sold growth-oriented stocks and bought defensive ones.

The market sentiment was dented by a report on manufacturing in China which showed a mild slowdown at the end of 2013 in the world's second-largest economy had continued into the New Year. Meanwhile, Chinese stocks that trade on American exchanges were down sharply after an SEC judge ruled that the Chinese units of the world's top accounting firms should be suspended from auditing those companies.

Among those suffering the most were Internet services provider Baidu, down 6.2 percent, and SINA, down 5.9 percent, on heavier-than-usual volume. Shares of Petrochina, the country's largest stock by market value, fell 3.1 percent.

The CBOE Volatility index VIX closed up 7.2 percent at 13.77 after rising more than 11 percent earlier.

After the bell, Microsoft reported that fiscal second-quarter earnings rose 3 percent, as strong sales of its Office software to businesses offset another weak quarter for its flagship Windows system, At the same time, consumers are selecting tablets over personal computers. Microsoft closed up 3.7 percent in after hours trading.

Starbucks reported that sales at established stores were lower than expected in its latest quarter as consumers spent more time holiday shopping online than at physical stores. Nonetheless, the shares ended the day up 1 percent in extended trading.

Apple gained 0.8 percent to close at $556.18. Activist investor Carl Icahn picked up another $500 million of Apple shares, bringing the billionaire's total investment in the company to $3.6 billion.

In other earnings news, McDonald's reported weaker-than-expected revenue as fewer customers ate at its restaurants. Nonetheless, the company’s shares rebounded from earlier losses to close up 0.5 percent at $95.32.

Netflix ended the day up 16.5 percent at $388.72, making it the best performer on the S&P 500. The company said Wednesday it added more than 2.3 million domestic customers in the fourth quarter.

Shares of Herbalife fell 10.3 percent to close at $65.92 in heavy volume after Massachusetts Senator Edward Markey asked for more information about its business practices. The company has been accused by prominent hedge fund manager William Ackman of running a pyramid scheme.

Thomson Reuter’s data through Thursday morning shows earnings for the fourth quarter are expected to grow 7 percent. Of the 102 companies in the benchmark that have reported, 63 percent have exceeded expectations, a number that is in-line with the long-term average.

Trading volume was higher than usual with 7.4 billion shares traded on the major equity exchanges as compared to a five-day average of 6.7 billion shares, according to BATS exchange data.

Economic Data Mixed

Residential re-sales rose in December after three straight months of declines, showing that there still is some resilience in the housing market recovery despite higher mortgage rates.

Sales of previously owned homes rose 1 percent last month to an annual rate of 4.87 million units, the National Association of Realtors said. However, the sales pace was slower than was expected and some blamed frigid weather. Sales fell in the Northeast and the Midwest, which suffered the brunt of cold weather in December.

Sales in 2013 were the highest since 2006 and prices increased 11.5 percent, the largest advance since 2005. December's rise added to pending and new home sales data in offering signs of a tentative pick-up in activity.

The Labor Department said initial claims for state unemployment benefits ticked up 1,000 to a seasonally adjusted 326,000 last week. The four-week average for new claims, considered a better measure of underlying labor market conditions as it irons out week-to-week volatility, fell by 3,750 claims to a total of 331,500 an indication that the labor market continues to improve.

Last week's claims report covered the survey period for January nonfarm payrolls data. The four-week average for new claims fell 12,250 between the December and January survey periods, suggesting some acceleration in job growth this month. Employers added only 74,000 new jobs to their payrolls in December after creating 241,000 positions the prior month. That was at odds with other employment indicators that suggested a brisk pace of hiring in December.

The jobless claims report also indicated that the number of recipients still receiving benefits under regular state programs after an initial week of aid rose to a six-month high in the week ended January 11. Yet, it also showed 1.35 million long-term unemployed Americans dropped off the rolls the week before after their benefits expired.

The expiration of these extended benefits will likely push the unemployment rate, currently at 6.7 percent, down by as much half a percentage point as some former recipients drop out of the labor force or take up low paying jobs that they previously would not have considered.

If the unemployment rate declines because former recipients of jobless benefits have dropped out of the labor force that could pose problems for the Federal Reserve. The Fed has said it will hold interest rates near zero at least until the jobless rate drops to 6.5 percent. However, if a large part of the decline reflects people dropping out of the labor force that could be seen as a sign of weakness, not strength.

Fed policymakers meet next Tuesday and Wednesday to discuss monetary policy and the outlook for the economy.