MarketView for October 25

 

 

Summary

 

The major equity indexes chalked up rather diminutive gains on Thursday primarily in the last hour of regular trading in what was mostly an uninspiring session on Wall Street, with worries about weak business spending keeping investors wary.

 

After the close of trading, Apple posted quarterly earnings that fell short of expectations. Apple's earnings per share came in at $8.67, compared with a consensus estimate of $8.75 per share. Trading of Apple's stock was halted after the close and ahead of the earnings, but trading resumed at about 4:50 p.m. Apple ended the day down 1.4 percent to close at $600.71 in extended-hours trading after its results, though it was down 4 percent when trading resumed.

 

Equity futures fell on the news, with S&P 500 futures dropping 3 points to 1,405.20, signaling a possible market decline on Friday.

 

The Nasdaq 100 Powershares exchange-traded fund, which tracks the Nasdaq 100 Index fell 0.7 percent in after-hours trading following Apple's results. Apple accounts for 19 percent of that index's value.

 

The broad S&P 500 has declined 3.6 percent over the previous five sessions before a modest rebound Thursday. A string of high-profile disappointments pointing to weak global demand has sapped buying enthusiasm after what has been a strong run in 2012.

 

There were a few bright spots during the day, such as Procter & Gamble up 2.9 percent to end the day at $70.07 after reporting stronger-than-expected results. However, that one result was not enough to motivate the Street.

 

Durable goods orders rose more than expected in September, though orders excluding volatile defense goods and aircraft were unchanged, and business investment showed signs of stalling.

 

With about 244 companies in the S&P 500 reporting results so far, 62.3 percent have beaten expectations, a slight improvement on the typical 62 percent average, Thomson Reuters data showed.

 

Revenue this quarter has been less than stellar, with just 36.3 percent of companies reporting higher-than-expected revenue - compared with a historic beat rate of 62 percent.

 

Big-picture uncertainty has also had a quiet dampening effect on stock prices as the countdown to the U.S. presidential election and the impending fiscal cliff begins in earnest.

 

Volume was relatively light, with just 6.34 billion shares changing hands on the major equity exchanges.

 

Unemployment Claims Fall

 

The Labor Department reported on Thursday prior to the opening bell that the number of Americans filing new claims for unemployment benefits fell last week by 23,000 claims to a seasonally adjusted 369,000 claims, giving a clearer sign that the labor market is healing after wild fluctuations in claims data at the beginning of the month. The prior week's figure was revised slightly higher to show 4,000 more applications than previously reported.

 

A Labor Department analyst said all states submitted data for the report and that there was nothing unusual in the raw data. The analyst said the data showed no signs of the factors that had appeared to generate sharp swings in the claims reading over the prior two weeks.

 

The four-week moving average, which smoothes out some of the weekly volatility, rose by 1,500 claims to 368,000 claims. A reading below 400,000 claims is considered a reasonable indicator of an increase in employment, with hiring likely to outpace layoffs. Nonetheless, the economy remains hobbled by a persistently high jobless rate. Incomes have stagnated and many families are awash in debts taken on during a housing bubble in the last decade.

 

Recently, however, the economy has shown a few positive signals, with the unemployment rate falling to 7.8 percent and retail sales picking up. Consumer confidence is also on an upswing.

 

Earlier this month, claims swung sharply lower and then higher, which a Labor Department analyst said was likely due to a change in the seasonal pattern that usually manifests at the beginning of the quarter. That distortion in the seasonal data appears to a have passed, the analyst said on Thursday.

 

Continuing claims for jobless benefits fell 2,000 in the week ended October 13 to a seasonally adjusted 3.254 million, the Labor Department said.

 

Business Spending Flat

 

The Commerce Department said on Thursday that non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, was unchanged last month at $60.3 billion. That was short of ' expectations for a 0.7 percent gain.

However, it is possible that companies are holding back investments due to fears that Congress will fail to avert sharp tax hikes and spending cuts in 2013, which threaten to send the U.S. economy back into recession.

 

The reading on investment plans was part of a larger report on long-lasting factory goods, which showed new durable goods orders posting their biggest gain last month since January 2010.

 

New orders for durables rose 9.9 percent, partially reversing a sharp loss in August. Wild fluctuations in aircraft orders have generated much of the volatility. Boeing received 143 orders in September, up from just one in August, according to information posted on the plane maker's website.

 

Transportation equipment rose 31.7 percent after plunging 33.7 percent in August. Excluding transportation, orders rose 2 percent. Economists had expected this category to rise 0.8 percent.

 

Shipments of non-defense capital goods orders excluding aircraft, which are used to calculate equipment and software spending in the gross domestic product report, fell 0.3 percent.

 

That reading fell every month during the third quarter.

 

Manufacturing, which has been the main driver of the recovery from the 2007-09 recession, has recently suffered as the European debt crisis has sent a chill over the global economy.

 

The Year 2013 Could Be Trying

 

Consumers will have to dig deeper into their pockets next year to pay for costlier healthcare, more expensive grocery bills and higher taxes, an extra drag on the country's already slow-moving economy.

 

The additional outlays look set to test the resilience of consumers, whose spending accounts for around two-thirds of the U.S. economy.

 

The strength of consumer spending has surprised some economists, given unemployment near 8 percent and anemic wage growth. Consumer spending has cushioned the blow to the United States from slower foreign demand for its goods. Households have shed about $880 billion in debt since the peak in the first quarter of 2008, according to Federal Reserve data. That has put many consumers on a path back to financial health.

 

However, an expiration of payroll tax cuts in early January and a spike in food prices could wipe 0.8 percentage points off U.S. economic growth next year, according to some economists.

 

The economy is now expected to expand by about 2 percent in 2013, down from 2.1 percent in 2012.

 

Consumer groups are noting caution on the part of households when it comes to such things as taking on more debt, retirement savings and gasoline prices.

 

Economists at JPMorgan say expiration in January of a temporary 2 percentage-point cut in the payroll tax would reduce household spending by $125 billion and lower gross domestic product by about 0.6 percentage point next year.

 

Still, loss of the payroll tax cuts would be only one aspect of the "fiscal cliff," a popular name for automatic across-the-board spending cuts and tax increases that would suck about $600 billion out of the economy next year.

 

Congress is expected to find a way to soften the blow of most scheduled tax hikes, including income taxes, and spending cuts due to take effect from January 1. But if they don't, the tax increases and spending cuts could result in the most severe belt-tightening in the United States since a tax increase in 1969 to pay for the Vietnam War.

 

Another area of concern for consumers is food prices. Rises in the prices of corn and soybeans and other field crops as a result of drought this year in the U.S. Midwest are expected to feed through into food prices late this year and in early 2013.

 

Soybean prices rose 40 percent over the summer, while wheat increased by about 50 percent. Prices have eased a bit since then, but the increases are expected to filter down to consumers. The Department of Agriculture sees food price increases of 3.5 percent to 4.0 percent next year, greater than this year.

 

Reflecting the strain on many budgets, consumers plan to spend an average of about $750 on gifts, decorations and other holiday items this season, only 1.2 percent more than a year ago, according to a recent survey published by the National Retail Federation.

 

That would be the smallest increase since 2008-2009, when holiday sales fell 1.8 percent during the financial meltdown.

 

Another extra outlay will be in healthcare premiums, which on average are costing employees more than $2,200 in 2012, according to one human resource consulting firm. Average health care premiums are forecast to jump by 6.3 percent in 2013. Over the last five years, employees' share of healthcare costs will have increased more than 50 percent, it said.

 

On top of everything else, the cost of a college education is being felt more keenly by many Americans.

 

Tuition costs for the 2012-13 academic year rose again but federal grant aid and tax benefits did not increase in the previous year - the most recent for which data is available - according to a report published on Wednesday by the College Board Advocacy & Policy Center.

 

The pain of higher living costs is not being felt evenly. Households with incomes under $75,000, people older than 50 and those with lower levels of education believe their financial positions are getting worse, according to a survey by Bankrate.com, a research firm specialized in consumer finance.