MarketView for November 24

 

 

Summary 

 

Share prices on Wall Street moved sharply higher on the day before the Thanksgiving holiday as the Street put aside worries of global problems and turned its attention instead to the improving labor market and signs that consumers are ready to begin spending again ahead of the most intense shopping day of the year.

 

New claims for unemployment benefits hit their lowest level in more than two years last week while consumer spending rose for a fourth straight month in October, suggesting the economy is nearing a self-sustaining basis. The data meant increased enthusiasm in the consumer sector, which has outperformed all year, as Black Friday, a key date for retailers and the traditional kickoff to the year-end shopping season, approached.

 

Amazon.com rose 5.4 percent to close at an all-time high of $177.25. Tiffany & Co posted quarterly earnings and sales that exceeded Street estimates as it forecasted strong holiday sales. Tiffany’s shares ended the day up 5.3 percent to close at $61.33.

 

The S&P 500 closed in on 1,200 for the fourth time in five sessions. The benchmark seems to be in a tight range between 1,175 and 1,200, without strong catalysts to break the trend in either direction.

 

Airline stocks were among the day’s best performers, with AMR up 8.1 percent to close at $8.70.

 

In other readings on the economy, data showed new durable goods orders registered their largest drop in nearly two years and sales of new single-family homes fell unexpectedly in October. However, the Thomson Reuters/University of Michigan's final November consumer sentiment index rose to its highest level since June.

 

Could the Recovery Start to Become Self-Sustaining

 

New claims for jobless benefits hit their lowest level in more than two years last week while consumer spending rose for a fourth straight month in October, suggesting the economy is nearing a self-sustaining recovery. The picture was further brightened by another report on Wednesday that showed consumer sentiment in November reached its highest level since June, likely reflecting the surge in stock prices in the wake of a Federal Reserve decision to again loosen monetary policy.

 

But the upbeat mood was tempered somewhat by unexpected declines in new home sales and in orders for long-lasting manufactured goods in October.

 

According to the Labor Department report released on Wednesday, initial claims for unemployment benefits fell by 34,000 claims to 407,000 claims, the lowest reading for that statistic since mid-July 2008.

 

A separate report from the Commerce Department showed consumer spending rose 0.4 percent in October, just a touch below the 0.5 percent gain expected on Wall Street. The jobs and spending data provided further evidence of a strengthening in economic activity and helped to divert investors' attention from Ireland's debt crisis.

 

Prices for Treasury debt fell, while the dollar touched a two-month high against the euro.

 

Spending is likely to see a large seasonal increase on Friday, the traditional start to the holiday shopping season. Consumers' willingness to spend was highlighted in Tiffany's quarterly results,.

 

Although spending increased last month, inflation continued to slow, helping to deflect criticism of the Fed's decision to pump more money into the economy by buying an additional $600 billion worth of government debt.

 

The Fed's preferred core inflation measure slipped to just 0.9 percent when measured from year-ago levels, the smallest gain on records dating to 1960. Fed officials, who are worried an unexpected shock could tip the economy into a troubling deflation, want to see inflation running around 1.7 percent to 2 percent.

 

The Thomson Reuters/University of Michigan's final November consumer sentiment index reached 71.6 this month, up from 67.7 in October. Nonetheless, an 8.1 percent drop in new homes sales to a 283,000 unit annual rate last month was a reminder of the risks to the recovery from the Great Recession. The median new home price dropped a record 13.9 percent from September to the lowest level since October 2003.

 

The Commerce Department also said durable goods orders slipped 3.3 percent, the largest decline since January 2009. Excluding transportation, orders dropped 2.7 percent, the biggest fall since March 2009. More concerning was the decline in non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending that fell 4.5 percent after rising 1.9 percent in September.

 

New Home Sales Decline

 

According to a Commerce Department report released on Wednesday, new single-family home sales fell unexpectedly in October and prices dropped to a seven-year low, pointing to sustained weakness in the housing market following the end of a home-buyer tax credit. According to the Department, sales fell 8.1 percent to a 283,000 unit annual rate after an upwardly revised 308,000 unit pace in September.

 

Housing remains one of the weak spots in the economy, which is showing some strength. With unemployment stuck at an uncomfortably high 9.6 percent, homeowners are struggling to hang on to their houses, keeping the foreclosure wave high and stifling the sector's recovery.

 

October's weak sales pace pushed up the supply of new homes on the market to 8.6 months' worth from 7.9 months' worth in September. However, there were 202,000 new homes available for sale in October, the lowest since June 1968.

 

The median sale price for a new home fell a record 13.9 percent last month from September to $194,900, the lowest since October 2003. Compared to October last year, the median price fell 9.4 percent making it the largest drop since July 2009.

 

Online Spending Rises

 

Online spending this holiday is now expected to rise by 11 percent over last year, comScore said on Tuesday, marking the second time the analytics firm has raised its closely watched view. The increased bullishness over e-commerce sales comes as retailers both on and offline ready for the key Thanksgiving weekend when holiday shoppers head to stores or to their computers in search of deals. The new spending outlook should bring total holiday e-commerce spending to $32.4 billion.

 

Cyber Monday, the day when consumers head back to work after the Thanksgiving weekend, is considered the kick-off to the online shopping season. But brick-and-mortar retailers from Wal-Mart to Staples are focused on early deals at their online units, while Internet giant Amazon.com has already gained market share this season, analysts say.

 

The current outlook, announced Tuesday, is based on the first 21 days of the November and December season, in which $9.01 billion has already been spent, marking a 13 percent increase over the year-ago period.

 

The increase in purchases is being attributed in part to deep discounts that started earlier than in 2009, when U.S. e-commerce sales rose 4 percent during the two-month holiday period. Online sales make up approximately 7 percent of the overall retail pie, according to comScore, and brick-and-mortar retailers are expecting a far less rosy sales outlook this year.

 

The National Retail Federation expects 2010 holiday retail sales -- which exclude online as well as food, vehicle and gasoline sales -- to increase 2.3 percent this year to $447.1 billion.

 

Recovery Act Worked

 

The stimulus package, widely panned by Republicans, injected life into the otherwise-sluggish economy between July and September, the nonpartisan Congressional Budget Office said on Wednesday.

 

The American Recovery and Reinvestment Act put between 1.4 million and 3.6 million to work in the third quarter of this year, a time when more than 15 million Americans were unemployed, CBO said. It also increased national output by between 1.4 percent and 4.1 percent during that time, the CBO said.

 

During the third quarter, the economy grew by an annual rate of 2.5 percent. The CBO's estimates have consistently shown that the $814 billion package of tax cuts, state aid, construction spending and enhanced safety-net provisions has blunted the impact of the worst U.S. recession since the 1930s. However, the stimulus program has failed to prevent the unemployment rate from rising above 8 percent, as the Obama administration stated originally.

 

The unemployment rate, currently 9.6 percent, would have been between 10.4 percent and 11.6 percent without the Recovery Act, the CBO said. The stimulus created the equivalent of 2 million to 5.8 million jobs during the third quarter as part-time workers shifted to full-time work, or employers offered more overtime work.

 

Voters by wide margins say the stimulus has been ineffective, and they handed a big victory to the Republicans who opposed it in the November 2 elections. Republicans have proposed rescinding the $12 billion that remains unspent when they take control of the House of Representatives in January.

 

The Recovery Act has already had its greatest impact on the economy and its effects will continue to wane into 2011, CBO said. However, not all elements of the Recovery Act got the same bang for the buck, the CBO said. Direct spending on highway construction, water-system upgrades and energy efficiency were among the most effective, the CBO said, while tax breaks for businesses and higher-income people cost more in lost revenues than they made up for in increased economic activity.

 

Federal Reserve Chairman Ben Bernanke has called on Congress to take additional measures to stimulate the economy, but his plea will likely be ignored as Republicans eye sharp spending cuts for next year.