MarketView for October 30

 

 

Summary

 

Stock prices were lower on Wednesday, with the S&P 500 index ending four consecutive days of higher closings after the Federal Reserve said it had a weaker growth outlook for the economy, even as it held steady with its stimulus program for the time being. Trading was volatile following the release of the statement, with the major U.S. stock indexes cutting losses to turn flat and dropping to session lows. Almost 70 percent of stocks on both the New York Stock Exchange and Nasdaq declined, while all 10 S&P 500 sector indexes fell.

 

While it had been widely expected that the U.S. central bank wouldn't announce any adjustments to its bond-buying program, the statement wasn't enough to extend a rally that has driven both the Dow and the S&P 500 to repeated record highs, including in early trading on Wednesday.

 

While the Fed's stimulus has kept a floor under stock prices this year, there have been signs that growth is slowing, including weak economic data and an earnings season marked by tepid revenue growth.

 

In trading following the market's close, Facebook chalked up a 9.7 percent gain to reach a share price of $53.78 after the social networking company reported revenue that was stronger than expected. Expedia gained 18 percent to $58.50 after reporting its results.

 

On the downside, Starbucks fell 2.8 percent to $78.60 after releasing 2014 earnings guidance that was below expectations.

 

The Dow industrials hit a record intraday high of 15,721 shortly after Wednesday's opening bell, while the S&P 500 also reached a lifetime intraday high of 1,775.22 early in the session.

 

General Motors ended the day up 3.2 percent to close at $37.23 after reporting a stronger-than-expected quarterly earnings number because of strength in its core North American market and a smaller-than-anticipated loss in Europe.

 

On the downside, Yelp fell 2.6 percent to $67.05 a day after it reported a wider third-quarter loss, while Western Union slid 12.4 percent to $16.85 after the company posted a steep drop in third-quarter earnings.

 

Of the 313 companies in the S&P 500 that had reported earnings through Wednesday morning, 68.4 percent have topped Wall Street's expectations, above both the 63 percent beat rate since 1994 and the 66 percent rate for the past four quarters, according to Thomson Reuters’ data. Revenue performance has been mixed, however, with 53.7 percent of S&P 500 companies beating expectations, well below the 61 percent average since 2002, but slightly above the 49 percent rate for the last four quarters.

 

Consumer Prices Up Slightly

 

Consumer prices rose modestly in September but there was little sign of underlying inflation in the economy, which should give the Federal Reserve scope to maintain its monthly bond purchases. The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI.

 

According to a report released Wednesday morning by the Labor Department, the Consumer Price Index increased 0.2 percent last month as energy prices rebounded, after edging up 0.1 percent in August. Removing the volatile energy and food components, the so-called core CPI rose 0.1 percent, about the same as last month.

 

In the 12 months through September, the CPI increased 1.2 percent, the smallest gain since April. It had advanced 1.5 percent in August. That took the increase over the past 12 months to 1.7 percent after rising 1.8 percent in August.

 

This measure touched a two-year low of 1.6 percent in June and the slowdown last month could catch the attention of some Fed officials who are concerned about inflation being too low.

 

Last month, inflation was lifted by a 0.8 percent rise in energy. That accounted for about half of the rise in the CPI last month. Energy prices had dropped 0.3 percent in August. Food prices were flat in September. That was the weakest reading since May.

 

Within the core CPI, housing and medical care costs advanced, maintaining a recent trend. Owners' equivalent rent of primary residence rose 0.2 percent after rising 0.3 percent in August.

 

ADP Says Hiring Has Slowed

 

According to data from ADP, private-sector employers hired the fewest number of workers in six months in October, suggesting the economy was still in need of stimulus from the Federal Reserve. Employers in the private sector added 130,000 new jobs to their payrolls this month, the ADP National Employment Report showed on Wednesday. That was the lowest reading since April.

 

September's private payrolls gains were revised down to 145,000 from the previously reported 166,000 jobs. The report, jointly developed with Moody's Analytics, suggested that the 16-day government shutdown early in the month had weighed on an already struggling labor market.

 

Private jobs growth slowed for the fourth month in a row this month, according to ADP data. Average monthly jobs growth has fallen below 150,000, which if sustained would make it difficult for the unemployment rate to fall further.

 

Fed Maintains Its Stance

 

The Federal Reserve extended its support for a slowing economy on Wednesday, sounding a bit less optimistic about growth and saying it will keep buying $85 billion in bonds per month for the time being. In announcing the widely expected decision, Fed officials nodded to weaker economic prospects due in part to a fiscal fight in Washington that shuttered much of the government for 16 days earlier this month.

 

The Fed noted that the recovery in the housing market had lost some steam and suggested some frustration at how slowly the labor market was healing. However, it also dropped a phrase expressing concern about a run-up in borrowing costs, suggesting greater comfort with the current level of interest rates.

 

"Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months," the policy-setting Federal Open Market Committee said. "Fiscal policy is restraining economic growth."

 

The Fed's statement differed only slightly from the economic assessment it delivered after it last meeting in September, and the reaction in financial markets was relatively subdued. In its statement, the Fed said the labor market had shown "some" further improvement, tempering its description after a recent weakening in the jobs figures.

 

Kansas City Federal Reserve Bank President Esther George dissented, as she has at every FOMC meeting this year, favoring a modest reduction in the pace of bond purchases.

 

The Fed shocked financial markets last month by opting not to scale back its bond buying, after allowing a perception to harden over the summer that it was ready to start easing off on the stimulus. Its caution has since been vindicated.

 

The Fed left its guidance on when it may raise rates unchanged, repeating that it would keep them near zero as long as the jobless rate remained above 6.5 percent and inflation did not threaten to rise above 2.5 percent. After the Fed's decision, traders of short-term U.S. interest-rate futures kept bets in place that the central bank will wait to raise overnight rates until at least April 2015.

 

The response to the Fed's aggressive easing of monetary policy has not been uncontroversial, with some Fed hawks and many Republicans arguing there is a risk of runaway inflation or financial market bubbles. However, core Fed officials, including Chairman Ben Bernanke and his presumptive successor, Vice Chair Janet Yellen, have argued that the threat of persistently high unemployment is the most pressing issue right now.

 

Facebook Reports Better Than Expected Numbers

 

Facebook posted strong growth in its mobile advertising business, driving a 60 percent increase in revenue that beat Wall Street's targets. Revenue from mobile ads, which appear on smartphones, represented 49 percent of Facebook's total advertising revenue in the third quarter, or roughly $880 million. Mobile ads generated roughly $150 million in the year-ago period, when Facebook was just beginning to develop its mobile ad business.

 

Facebook said the number of its monthly active users increased to 1.19 billion as of the end of September, up from 1.15 billion at the end of June. Facebook said it counts roughly 507 million daily active mobile users.

 

The Company saw its share price double in the past three months, as the Street warmed to the Internet company's ability to thrive as consumers increasingly access the Web on smartphones and other mobile devices.

 

Facebook's total revenue in the third quarter was $2.016 billion, ahead of the average analyst expectation of $1.911 billion, according to Thomson Reuters I/B/E/S.

 

Facebook said it earned net income of $425 million, or 17 cents a share, in the three months ended September 30, compared with a net loss of $59 million, or 2 cents a share in the year-ago period. The Company’s shares rose 9.4 percent to $53.60 in after-hours trading.