MarketView for November 9

Summary

Stocks advanced on Friday but failed to make up for what turned out to be the worst week for markets since June, as investors turned their attention from the presidential election to the coming negotiations over the "fiscal cliff."

The market gave up some early gains after President Barack Obama and House Speaker John Boehner, in separate public remarks, made it clear that partisan sparring would likely dominate the next several weeks.

The S&P 500 finished Friday's session up 0.17 percent, but it fell 2.4 percent for the week - the worst since early June. For the week, the Dow fell 2.1 percent and the Nasdaq lost 2.6 percent.

The outlook was somewhat brightened earlier in the day when new economic data showed consumer sentiment was at its highest level in more than five years, according to the Thomson Reuters/University of Michigan surveys, and wholesale inventories jumped in September, according to a Commerce Department report.

Shares of Disney fell 6 percent to $47.06, dragging on the Dow after the company reported results late Thursday. The company said coming results will be under pressure due to declining home video sales and rising costs.

Groupon's shares fell 29.6 percent to $2.76 a day after the daily deal company's results fell short of Wall Street's expectations.

The market's early gains on Friday came after stronger-than-expected figures on consumer sentiment. However, enthusiasm cooled after hearing from the House speaker and the president about the fiscal cliff.

Boehner reiterated his opposition to any tax hikes on the wealthy late this morning. Obama responded in the early afternoon by saying there was no way around tax increases, but that he would remain open to any new ideas that congressional leaders might have.

The fiscal cliff is a combination of government spending cuts and tax increases set to go into effect early next year unless Congress acts to change the law before then. It could take an estimated $600 billion out of the U.S. economy and push it into recession. 

Investors are reacting to the prospect of higher tax rates by selling both losing and winning stocks for the year to decrease the tax impact from their positions.

The euro zone is also not inspiring confidence. Greece's finance minister said his country was running out of cash, growth in Germany is expected to weaken in the next two quarters, and France's central bank said the country's economy would slip into recession as 2012 ends. Germany and France are the euro zone's two largest economies, and Greece has been scraping by, thanks to a 130-billion-euro bailout.

International Game Technology gained 5.2 percent to $13.50 after the slot machine company reported better-than-expected fourth-quarter earnings.

Lions Gate Entertainment ended the day up 14.3 percent to $16.68 after reporting earnings of $75.5 million, an above-expectation figure that was boosted by the studio's blockbuster movie, "The Hunger Games.

According to Thomson Reuters data through Friday, of the 449 companies in the S&P 500 that have reported earnings, 63.3 percent have topped analysts' expectations - slightly above the 62 percent average since 1994, but below the 67 percent beat rate over the past four quarters.

But revenue results remain disappointing, with only 38.2 percent of companies topping expectations - well below the 62 percent average since 2002, and the 55 percent beat rate over the past four quarters.

China Returns to Expansion Mode

China's economy is on the road of recovery from its slowest growth in three years as indicated by data for October indicating infrastructure investment accelerated and output from the country's factories ran at its fastest in five months.

The uptick in key economic activity indicators last month, after signs of a rebound emerged in September data, thanks to pro-growth policies implemented by the government in recent months after seven successive quarters of slowing activity. The decline dragged the annual rate of economic expansion down to 7.4 percent in Q3 - its lowest since early 2009 - leaving the world's second largest economy on track to mark its most sluggish year since 1999.

As a result there is expectation that China's GDP growth will expand at an 8.3 percent pace in the first half of 2013, picking up from a 7.8 percent rate in Q4.

Despite signs of strength, analysts broadly say that further gains depend largely on the government maintaining its commitment to pro-growth monetary and fiscal policies, even though few economists expect additional action in the near term.

"I don't expect any easing in monetary policy until the end of this year because it would be unnecessary as the economy is recovering," Yao Wei, China economist at Societe Generale in Hong Kong, told Reuters.

Beijing has been fine-tuning economic policy for a year to support growth, and analysts expect that program to broadly remain in place after a new leadership of the ruling Communist Party is unveiled at a congress that began on Thursday.

Outgoing party chief, President Hu Jintao - almost certain to be succeeded by Vice President Xi Jinping - said in a speech to the congress that China would stick to policies fostering sustainable, long-term economic development with the aim of doubling GDP over the 10 years to 2020.

China has cut benchmark interest rates twice this year, lowered bank reserve ratios three times since late 2011 and made repeated, large-scale liquidity injections into the financial system to underpin slowing growth in the short-term. Meanwhile, key barometers of both domestic activity and output from China's export-oriented factory sector offered further evidence that policy loosening is working.

Consumer inflation eased to its slowest pace in nearly three years in October, with the 1.7 percent rise from a year ago slower than the 1.9 percent posted in September. Factory-gate prices in October fell 2.8 percent from a year earlier, a touch faster than the forecast fall of 2.7 percent but easing from September's 3.6 percent annual drop, which bodes well for a corporate sector struggling to cope with falling profits due to producer price deflation.

Drawing a Line in the Sand

President Barack Obama would not sign legislation that extends the current lower tax rates for the wealthiest Americans, the White House said on Friday.

"The president would veto, as he has said ... any bill that extends the Bush-era tax cuts for the top two percent of wage earners, of earners in this country," White House spokesman Jay Carney said at a briefing.

Obama will hold talks with congressional leaders at the White House next Friday on avoiding the looming steep government spending cuts and tax rises, Carney said. The president will hold a news conference on Wednesday, Carney told reporters.

Obama, in a statement delivered earlier at the White House, said he would launch discussions to try reaching a deficit reduction deal that eluded the White House and congressional Republicans in 2011.

The president urged lawmakers to immediately pass an extension of tax cuts on most Americans with the exception of the top earners. The tax cuts are due to expire on December 31.

Republicans have said they would agree to increasing government revenues, but have objected to any increases in tax rates. House Speaker John Boehner said this week that raising tax rates on the top two brackets would cost 700,000 jobs.