MarketView for October 5

 

 

Summary

 

The S&P 500 broke a four-day string of gains, ending slightly lower on Friday as an unexpected drop in the U.S. unemployment rate was overshadowed by concerns about the coming earnings season, which begins with Alcoa next week. All three major equity indexes came off session highs by the afternoon, with the S&P 500 index turning negative for the first time this week, as Wall Street braced for weak corporate results. The Nasdaq was pressured by Apple, which fell 2.1 percent to close at $652.59.

 

S&P 500 earnings for the third quarter are forecast to have fallen 2.4 percent from the year-ago period, which would be the first decline in three years, according to Thomson Reuters data. Yet, despite the lackluster performance for the day, the S&P 500 is still up 16.2 percent so far this year. The benchmark is on track for its best yearly run since 2009 when stocks rebounded after the financial crisis.

 

Most of the market's gains this year have been prompted by easy monetary policies. The improvement in U.S. hiring last month is one bright spot as manufacturing around the world has been showing signs of softness in recent months.

 

For the week, the Dow rose 1.3 percent, the S&P 500 advanced 1.4 percent and the Nasdaq added 0.6 percent.

 

Alcoa will kick off the earnings period on Tuesday, when the company is expected to report that it broke even, compared with earnings of 15 cents a share a year ago. Alcoa ended the day up 0.2 percent to close at $9.07.

 

Labor Department data indicated that the unemployment rate fell by 0.3 percentage point in September to 7.8 percent, the lowest level for that economic statistic since January 2009. Investors focused on a survey of households that pointed to a large surge in hiring.

 

A separate survey of business establishments showed employers added 114,000 jobs to their payrolls last month while data for July and August was revised to show 86,000 more jobs created than previously reported.

 

Zynga ended the day down 11.9 percent to close at $2.48 after the company reduced its 2012 outlook for a second time, raising doubts with regard to the games maker's ability to shore up its dwindling earnings.

 

Facebook, which derives more than a tenth of its revenue from fees paid by Zynga, lost 4.7 percent to $20.91.

 

Sprint Nextel is considering making a rival bid for MetroPCS Communications, which agreed on Wednesday to a merger with Deutsche Telekom's T-Mobile USA, according to people familiar with the situation. Sprint Nextel shares rose 2.2 percent to $5.20, while MetroPCS lost 0.3 percent to $12.65.

 

About 5.7 billion shares changed hands on the three major equity exchanges, as compared to an average daily volume of 6.38 billion shares.

 

Unemployment Falls Sharply

 

The unemployment rate fell to 7.8 percent last month, dropping below 8 percent for the first time in nearly four years and giving President Barack Obama a potential boost with the election a month away.

 

The rate declined from 8.1 percent because the number of people who said they were employed soared by 873,000 — an encouraging sign for an economy that's been struggling to create enough jobs. The number of unemployed Americans is now 12.1 million, the fewest since January 2009. The Labor Department said employers added 114,000 jobs in September. It also said the economy created 86,000 more jobs in July and August than the department had initially estimated.

 

Wages rose in September. And more people started looking for work. The revisions show employers added 146,000 jobs per month from July through September, up from 67,000 in the previous three months.

 

The 7.8 percent unemployment rate for September matches the rate in January 2009, when Obama took office. In the months after Obama's inauguration, the rate rose sharply and had topped 8 percent for 43 straight months. The October jobs report will be released only four days before Election Day.

 

The job market has been improving, sluggishly but steadily. Jobs have been added for 24 straight months. There are now 325,000 more than when Obama took office. The number of employed Americans comes from a government survey of 60,000 households that determines the unemployment rate.

 

The government asks a series of questions, by phone or in person, such as do you own a business? Did you work for pay? If not, did you provide unpaid work for a family business or farm? (Those who did are considered employed.)

 

Afterward, the survey participants are asked whether they had a job and, if so, whether it was full or part time. The government's definition of unemployed is someone who's out of work and has actively looked for a job in the past four weeks.

 

The government also does a second survey of roughly 140,000 businesses to determine the number of jobs businesses created or lost.

 

The September job gains were led by the health care industry, which added 44,000 jobs — the most since February. Transportation and warehousing also showed large gains. The revisions also showed that federal, state and local governments added 63,000 jobs in July and August, compared with earlier estimates that showed losses.

 

Still, many of the jobs the economy added last month were part time. The number of people with part-time jobs who wanted full-time work rose 7.5 percent to 8.6 million, the most since February 2009.

 

Housing Frustrates Fed

 

A disappointing rebound within the housing industry has that industry continuing to drag on the country's overall economic recovery, two influential Federal Reserve officials said on Friday, highlighting a corner of the economy that still frustrates the Fed.

 

New York Federal Reserve Bank President William Dudley said the housing market's failure to fully respond to the Fed's easy money policies remains a headwind to U.S. growth, while Elizabeth Duke, a governor at the central bank, highlighted problems associated to the "extraordinary" level of abandoned properties.

 

A bubble in the U.S. housing market was at the core of the 2007-2009 financial crises and the lackluster environment that continues to hamper the world economy today. Although housing prices have edged up this year, Dudley said credit availability remains "impaired" and the overall pace of the broader U.S. economic recovery has been disappointing.

 

"While there are several headwinds that have been restraining economic growth, a key impediment is that the housing market has failed to respond fully to the significant easing of monetary policy," Dudley said at a residential real estate conference hosted by the New York Fed.

 

The Fed has kept benchmark interest rates at an ultra-low level for nearly four years and has bought up more than $2 trillion in assets to kick-start growth and get Americans back to work. It launched a third round of asset buying last month and signaled it would keep rates near zero for three more years.

 

The consensus of opinion appeared to be that the housing market had finally begun to rebound as prices began to stabilize last August. Although home sales were near two-year highs in August, the industry is still facing a large overhang of foreclosures and the many people remain underwater on their home mortgages.

 

Dudley, who as head of the powerful New York Fed bank has a permanent vote on monetary policy, said "various housing market indicators have looked somewhat better of late," including home prices. However, he also said the absolute level of housing starts remains low and housing market conditions vary across the country, causing problems.

 

 "The net result is that while housing's contribution to growth has finally turned positive, its magnitude is far below that experienced in previous recoveries," Dudley said.

 

In a speech that dug into the details of where and why homes became vacant, Duke identified three broad categories that described most concentrations of abandoned U.S. homes: post-housing boom neighborhoods, poorer inner city districts, and less-obvious suburban communities in prolonged decline.

 

"Doubtless there will be costs associated with solving these problems, but it is important to also consider the costs of doing nothing," Duke said at the same conference, citing lost tax-revenue and the cost of demolition.

 

Among the fallout from the burst housing bubble are the many abandoned properties that continue to inflict heavy costs on the wider community which may warrant government aid to ease the problem, she argued.

 

"In order to see the robust economic recovery we all want, we need to deal effectively with the large volume of vacant and distressed properties throughout the country," said Duke, one of the seven presidentially appointed Fed governors who have permanent votes on monetary policy.

Although unsold home inventory levels have declined as real estate has picked up, the number of abandoned homes remains stubbornly high, she noted.