MarketView for November 28

Summary 

Stocks rebounded from seven days of losses on Monday as Wall Street once again clung to the hope that the latest effort from European leaders might actually resolve the region's debt crisis. As a result, many investors soon found themselves in a position where they were forced to cover short positions, thereby adding some momentum to the markets. Nonetheless, volume was light with only about 6.8 billion shares changing hands on the three major equity exchanges, a number that was well below the daily average of 8 billion shares.

The latest attempt to solve the euro zone problems centered on a French-German push for tighter budgetary control over euro zone members. Germany and France pushed to acquire powers to reject national budgets in the euro zone that breach European Union rules ahead of an EU summit on December 9. At the same time, an Italian newspaper report suggested the International Monetary Fund was preparing a rescue plan for Italy. However, the IMF denied the report.

Meanwhile, after the market's close Fitch Ratings revised to negative the outlook on the United States' AAA credit rating after a special congressional committee failed to agree on at least $1.2 trillion in budget cuts. Stock futures showed little movement after the announcement from Fitch, most likely because the markets have been expecting just such a move.

Retailers were among the strong sectors following a robust start to the holiday shopping season. Record sales over the Thanksgiving weekend buoyed gains in large retailers, including Macy's, which ended the day up 4.7 percent to close at $30.84. Weak consumer spending has been a worry for investors, and the holiday period would likely confirm whether there's been any improvement in that area. The S&P retail index advanced 3.1 percent, including Best Buy, which closed up 3.4 percent at $26.49.

During the trading day all 10 S&P sectors were up sharply, but energy and consumer discretionary stocks were among sectors with the largest gains. The S&P energy index was up 3.6 percent, while the S&P consumer discretionary index was up 3 percent and S&P financials rose 3 percent.

Fitch Says You Have Been Warned

Fitch Ratings gave the United States until 2013 to come up with a "credible plan" to tackle its ballooning budget deficit before it downgrades the country's coveted AAA rating.

The ratings agency said on Monday it revised to negative from stable the outlook on the U.S. credit rating after a special congressional committee failed last week to agree on at least $1.2 trillion in deficit-reduction measures.

"The negative outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. AAA sovereign rating will be forthcoming," the ratings agency said in a statement.

The so-called "Super Committee" of six Democrats and six Republicans last week said they could not agree by their deadline on deficit reduction, setting in motion automatic cuts that should result in lowering the deficit by $1.2 trillion over 10 years. The cuts are designed to be split evenly between domestic and military programs.

Rival agency Standard & Poor's cut the U.S. rating to AA-plus in an unprecedented decision on August 5, citing concerns about the government's budget deficit and rising debt burden. It maintains a negative outlook on the credit.

Moody's Investor Service assigned its U.S. credit rating a negative outlook on August 2 but affirmed the country's top-notch standing at Aaa. That leaves Moody's with a general time frame of 18 months to two years in which it could decide whether to cut the rating.

Both S&P and Moody's said on November 21 the committee's failure would have no immediate impact on their ratings. However, Moody's on November 23 warned the United States that its rating could be in jeopardy if lawmakers backtrack on the automatic cuts of $1.2 trillion due to take effect starting in 2013.

Home Sales Rise but Prices Fall

According to a report released by the Commerce Department on Monday morning, sales of new homes were higher in October and the supply of homes on the market fell to its lowest level since April of last year, showing some healing in the battered housing sector. At the same time, the Department said that sales edged up 1.3 percent to a seasonally adjusted 307,000-unit annual rate, which was the fastest pace in five months.

From an inventory perspective, at October's sales pace there is a 6.3 month inventory of new homes on the market, down from 6.4 months in September. The hope now is that the housing market may finally be bottoming out.

Nonetheless, falling home prices and tighter credit continue to be the bane of the recovery, which has not been able to show any real traction since the Great Recession. Furthermore, the Commerce Department's report showed the median sales price dropped 0.5 percent in October to $212,300, the lowest in a year. Falling prices could hamper the housing market by making buyers see homes as a bad investment. Still, compared to October last year, the median price was up 4.0 percent.

The housing market has been hurt by a glut of unsold properties and an unemployment rate that has been stuck around 9 percent.

The U.S. Federal Reserve has held short-term interest rates at nearly zero since 2008 and has expanded its balance sheet in a bid to get credit to businesses and households. That has helped bring 30-year mortgage rates to record lows. The problem is that even with low rates, many would-be borrowers still cannot get a loan.

At the same time, report from the New York Federal Reserve Bank showed U.S. consumers continued to dig out from record debt loads taken on during the housing boom, with total consumer credit dropping 0.6 percent in the third quarter.