MarketView for November 4

Summary  

Stock prices showed excellent momentum in the morning half of the trading day but lost steam on Wednesday afternoon after the Federal Reserve said it would keep rates near zero for "an extended period" even as it expressed confidence in the economic recovery.

Stocks pushed higher in the hour following the FOMC statement, after the Fed kept its benchmark federal funds rate unchanged in a range of zero to 0.25 percent. However, the market was unable to hold those gains as it succumbed to selling pressure in the last half-hour of trading.

The Fed's closely watched policy statement was somewhat more upbeat than its statement in September. However, it was also more explicit about why it expects to keep rates low, citing "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."

After the closing bell, Cisco Systems gained 3.1 percent to $24.02 after the network equipment vendor said quarterly revenue rose more than expected from its previous quarter. The company also said its board authorized up to $10 billion in additional stock buybacks.

The healthcare sector jumped on hopes the Obama administration's healthcare reforms may be slowed after Republicans scored some key election victories. Healthcare stocks also gained on news that Wellcare Health Plans posted a quarterly profit exceeding Street estimates even as membership fell about 8 percent from a year earlier. The shares were up 6.7 percent to $28.09.

Intel rose 1.3 percent to $18.59 even after it was sued by New York Attorney General Andrew Cuomo, who accused the company of threatening computer makers and paying billions of dollars in kickbacks to maintain its market dominance.

Wall Street opened higher after ADP's private-sector report showed signs of improvement in the labor market. The three major U.S. stock indexes extended gains following a strong reading on the U.S. services sector from the Institute for Supply Management.

Fed Not Changing Rates

The Federal Reserve said on Wednesday that the economic recovery was building, even as it stuck to its commitment to keep borrowing costs near zero for "an extended period." As expected, the Fed closed out a two-day meeting with a decision to keep benchmark overnight interest rates in a range of zero to 0.25 percent. The vote was unanimous.

In a statement announcing the decision, the Fed said the U.S. economy had "continued to pick up" since its last meeting in September, but it expressed concern the recovery was likely to be muted.

"Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," it said. While still emphasizing risks, the Fed was a bit more upbeat than in September, when it had simply said spending was "stabilizing."

Now that the economy is starting to recovery, financial markets are increasingly wondering when the Fed and other central banks around the globe will begin to remove the extraordinary economic support they have provided.

The central bank was more explicit than it had been previously on why it expects to be able to keep rates "exceptionally low" for a long time, citing the slack that has built up in the economy and the lack of an inflationary threat.

By citing "low rates of resource utilization, subdued inflation trends, and stable inflation expectations," the Fed is providing a road map to follow to determine when it may finally begin to tighten policy.

In another shift, the Fed said it would buy only about $175 billion of debt issued by government-backed mortgage finance agencies, saying the paper was scarce. It had planned to buy up to $200 billion as part of an effort to keep mortgage costs low.

It is possible that the Fed may have made the shift to see how markets would respond as a way to inform its thinking about how best to eventually exit its policy support. Prices for government debt fell on worries about massive debt supply in the coming days, while interest rate futures turned higher as traders cut bets the Fed would soon step back from its easy money policy. The dollar weakened.

Top Fed officials, including Chairman Ben Bernanke, have said the recession has left a legacy of high unemployment and idle factories that should keep price pressures in check.

The European Central Bank is expected to keep rates on hold at a record-low 1.0 percent on Thursday; while there is a good chance the Bank of England will expand its large asset purchase program at a meeting the same day.

Service Sector Grows

The services sector grew modestly for a second month in a row in October and private sector employers cut jobs at the slowest pace in more than a year, adding to signs the economy is crawling back to health. The sector, which represents about 80 percent of all domestic economic activity, grew in October, but the growth was less than forecast and the survey's employment index disappointed analysts.

The Institute for Supply Management's services data followed European surveys showing service sector activity expanded at its fastest in 22 months in October in the euro zone, and in Britain at its briskest since August 2007, when the global credit crunch struck.

The ISM services index slipped to 50.6 last month from 50.9 in September, below economists' median forecast for a rise to 51.5. A reading above 50 indicates growth. The employment index fell to 41.1 in October from 44.3 in September.

Cisco Beats Expectations

Cisco Systems posted a stronger-than-expected quarterly profit and signaled that recovery was well on its way, as businesses are investing in network equipment again after cutting back for the past year.

Chief Executive John Chambers gave a revenue forecast for the current quarter, its fiscal second, that topped Wall Street expectations and said that business conditions had hit bottom at least six months ago. Shares of Cisco rose 3.7 percent.

"Q4 fiscal 09, as we indicated in last quarter's conference call, looking back, was clearly the tipping point," Chambers told analysts on a conference call on Wednesday.

Cisco also said its board of directors authorized up to $10 billion in additional share repurchases, bringing its total outstanding repurchasing program to around $13.1 billion.

Cisco is the world's top vendor of routers, switches and other network equipment used by global businesses, including phone companies as well as governments. Many of those customers had put off large investment decisions during the recession, but analysts have said many were beginning to shift gears toward more spending to cope with growing Internet traffic.

Revenue in its fiscal first quarter, ended October 24, fell 13 percent from a year earlier to $9.0 billion. But that was up 6 percent over last quarter. The company forecast fiscal second quarter revenue to increase 1 percent to 4 percent from a year earlier, or a rise of 2 percent to 5 percent compared to the first quarter. The average Wall Street estimate for the second quarter had implied a revenue decline of 1.3 percent year on year.

Net profit was $1.8 billion, or 30 cents a share, compared with $2.2 billion, or 37 cents a share, a year earlier. Excluding items, profit was 36 cents a share compared to 42 cents a share a year earlier, and higher than the average Wall Street forecast of 31 cents.

Shares of Cisco rose to $24.15 in after-hours trading from their Nasdaq close of $23.29. The stock has climbed more than 40 percent since the start of the year.