MarketView for October 27

Summary 

Share prices were somewhat lower on Wednesday as Wall Street revisited the expectations of how aggressively the Fed would act to stimulate the economy. With the uncertain election outcomes and a Fed meeting next week, the Street began to take into account the possibility that the financial markets will undergo a round of increased volatility. The CBOE Volatility index .VIX rose 2.4 percent and was up for the third consecutive day.

Materials stocks, which have rallied in recent weeks on expectations of heavy stimulus, were the day's largest casualties. In recent sessions, investors reduced their bets on the size and timetable of the Fed's potential purchases of Treasury debt. The Wall Street Journal furthered those expectations after reporting the Fed hoped to avoid a "shock and awe" approach.

Among the materials sector's largest decliners on a percentage basis were Freeport McMoRan Copper & Gold, down 2.8 percent to close at $95.50, and AK Steel Holding, down 3.4 percent to close at $12.40.

The Nasdaq advanced as Broadcom rose 11.7 percent to $41.56, a day after it unexpectedly forecast a potential rise in fourth-quarter revenue. Procter & Gamble’s quarterly earnings number exceeded expectations, helped by rising sales and profits in emerging markets. The company’s shares ended the day up 0.4 percent to close at $63.08.

The day's economic data was mixed, with sales of new U.S. single-family homes rising more than forecast in September, while demand for durable goods, excluding aircraft, falling unexpectedly during the same month.

Economic Data Continues to Reaffirm Slow Growth

Durable goods orders goods fell unexpectedly last month and a gauge of business spending plans also declined, underscoring the economic recovery's tepid pace. At the same time, a report from the Commerce Department on Wednesday indicated that new home sales continued to bounce along the bottom, leaving intact expectations in financial markets that the Federal Reserve would again ease monetary policy, most likely next week.

Orders for durable goods excluding transportation fell 0.8 percent after rising 1.9 percent in August as bookings for communications equipment tumbled sharply. The expectation had been for a 0.5 percent gain.

Overall orders, however, rose 3.3 percent -- the largest increase since January -- lifted by a surge in demand for aircraft. Orders had fallen 1 percent in August and economists were expecting a 2 percent increase in September.

Another report indicated that new home sales rose 6.6 percent last month to a still-weak 307,000 unit annual rate.

While the durable goods data supported other recent evidence of cooling in manufacturing, the home sales figures pointed to some improvement in the battered housing market, resulting in the Street’s traders anticipating less aggressive action from Fed policymakers who plan to meet on November 2-3.

U.S. stocks ended mixed, with the Dow industrial average and S&P 500 weaker and the Nasdaq Composite slightly higher. The dollar pushed into positive territory against major currencies for the year. Prices for U.S. government debt fell.

Analysts expect Fed officials next week to announce bond purchases of at least $100 billion a month to push borrowing costs lower to help rejuvenate the economy's sputtering recovery from the worst recession in 70 years.

The central bank, which cut overnight interest rates to near zero in December 2008, has already purchased about $1.7 trillion worth of Treasury and mortgage-related debt.

Business spending, which has been growing strongly, is starting to slow down. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business investment, slipped 0.6 percent in September after a 4.8 percent increase in August. Markets had expected a 0.8 percent gain.