MarketView for November 20

Summary

The major equity indexes were lower on Wednesday after the Federal Reserve's released the minutes of its last meeting said the central bank could begin to scale back its stimulus program at one of its next few meetings. Keep in mind that the meetings are about 6 weeks apart, meaning that few meetings translates to 18 to 24 weeks or 4 to 6 months.

While Fed officials said such a move would happen only if economic conditions warranted it, Wall Street in its “The sky is falling mentality,” is now looking for the tapering to begin any time.  As a result, share prices reversed course after the Fed minutes, with all three major equity indexes trading slightly higher just before the release. Bond yields added to gains. As a result, Wednesday marked the S&P 500's third straight day of declines, with the day's losses fairly broad-based. Nine of the 10 index sectors ended lower.

Yet, overall the minutes differ little from previous statements and many analysts still do not believe that the Fed will change its bond-buying program before the end of this year. And it is true that the Fed's continued stimulus has largely driven the market's rally this year with the S&P 500 up 25 percent so far this year.

Among the S&P 500's largest percentage decliners, Lowe's fell 6.2 percent to close at $47.33 after the retailer reported slightly lower-than-expected quarterly earnings. Lowe's also gave a disappointing outlook for the fiscal year ending January 31.

In a speech late Tuesday, Fed Chairman Ben Bernanke echoed last week's dovish comments by his nominated successor, Janet Yellen. He said the Fed will maintain its ultra-easy monetary policy for as long as needed.

After the bell, shares of Williams-Sonoma rose 5.6 percent to close at $58.60 following its earnings report. The upscale home products retailer, whose brands include Pottery Barn and West Elm, also raised its guidance.

The day's economic data offered some proof of upside momentum in the economy early in the fourth quarter. October retail sales, excluding automobiles, gasoline and building materials, or so-called core retail sales, rose 0.5 percent, exceeding expectations.

Among the day's gainers, J.C. Penney was up 8.4 percent to close at $9.44. The stock was the S&P 500's biggest percentage gainer after the department store operator said November sales were encouraging. Chief Executive Myron Ullman said results indicated that a turnaround of J.C. Penney is starting to "take hold."

Approximately 5.98 billion shares changed hands on the three major equity exchanges, a number that was slightly below the five-day average closing volume of about 6.05 billion shares, according to BATS exchange data.

Consumer Spending Up – Inflation Down

According to a report released by the Commerce Department Wednesday morning, consumer spending was higher than expected during the month of October as households bought a range of goods, suggesting upside momentum in the economy early in the fourth quarter. At the same time, the Labor Department reported on Wednesday that there was an unexpected decline in consumer prices last month.

Retail sales excluding automobiles, gasoline and building materials increased 0.5 percent last month after advancing 0.3 percent in September, the Department said. The better-than-expected increase in core retail sales suggested consumer spending would likely accelerate from a two-year low touched in the third quarter and probably limit downside risks to economic growth during the fourth quarter.

Core retail sales last month were bolstered by sturdy gains in receipts at clothing, furniture, electronics and sporting goods shops, among others. Sales at electronics and appliance stores rose by the most since April, suggesting a residual boost from the introduction of Apple's new iPhone the previous month.

The report suggested little impact from a 16-day partial shutdown of the federal government in October, which had been expected to dampen sales somewhat.

Sales at auto and parts dealers rebounded 1.3 percent after falling 1.2 percent in September. That helped to offset a drop in sales at gasoline stations and a fall in receipts at building materials and garden equipment stores, lifting overall retail sales 0.4 percent in October. Retail sales were flat in September and economists had expected them to edge up 0.1 percent last month.

Consumer Price Index Falls

The Labor Department reported that its Consumer Price Index fell 0.1 percent last month as gasoline prices fell sharply, after rising 0.2 percent in September. In the 12 months that ended October 31, the CPI increased 1.0 percent, making it the smallest gain since October 2009. The CPI was up 1.2 percent in September.

If you remove the volatile energy and food components, the core CPI edged up 0.1 percent for the third consecutive month. That could heighten the Fed’s concerns about inflation being too low. The Fed never wants to see a deflationary environment.

Over the past 12 months, the core CPI increased 1.7 percent, matching the prior month's rise. The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI.

The absence of inflation in the economy suggests the Fed will probably stick to its monthly $85 billion bond buying program at least through early 2014 as it tries to stimulate demand through low interest rates.

Fed Chairman Ben Bernanke said on Tuesday the U.S. central bank would maintain its ultra-easy monetary policy for as long as needed, adding that policymakers wanted evidence of durable job growth before scaling back bond purchases.

Existing Home Sales Fall

The National Association of Realtors Sales reported on Wednesday that sales of existing homes fell in October to their lowest since June, due in part to an inventory shortage and rising property prices that have dampened buying power. According to the NAR, sales fell 3.2 percent last month to an annual rate of 5.12 million units.

At the same time, the median price rose 12.8 percent in October from a year ago to $199,500. It was the 11th straight month of double-digit gains, and up from last month.

October's inventory was 2.13 million existing homes for sale, up just 0.9 percent from the year-earlier period, representing five months' supply at the current pace. The pace of annual sales growth decelerated to 6 percent in October, as tight credit conditions and high borrowing costs are impacting the housing market recovery. Purchases fell in the month in all four regions, with the most dramatic drop seen in the West, where they declined 7.1 percent.

First time buyers remain on the sidelines, representing 28 percent of all home purchases, which is below the historical average. The rate has fallen below 30 percent for 7 straight months. At the same time, cash purchases remain elevated and account for about 31 percent of home purchases. Investors snapped up 19 percent of the market, similar to the September sales figures.

Sales in coming months are also expected to be hampered by a lack of inventory on the market and a government shutdown that has halted some final property transactions.

The NAR said a combination of high home prices and increased mortgage rates was hurting affordability. The trade group said the rate of newly constructed homes is disappointing and hampering the broader housing market recovery.