MarketView for September 7

Summary  

Wall Street rebounded sharply on Wednesday, reversing three days of losses after Germany's top court smoothed the way for Berlin's participation in bailouts that could ease Europe's debt crisis. Nonetheless, although I remain bullish as always on investing in equities, caution is still the order of the day given the low volume with little letup in volatility.

Volume was just 7 billion shares changing hands on the major equity exchanges, making the day among the lightest over the past month and well below last year's average of 7.56 billion shares traded per day. The CBOE Volatility index fell 9.6 percent but still remained over 30, a level often seen as a warning sign for equity markets. The index usually moves inversely to the S&P 500.

Financial stocks rebounded sharply with Bank of America closing up 7 percent at $7.48. The bank was also the top percentage gainer on the Dow Jones industrial average, due in part to an executive management shake-up. Bank of America has lost almost half of its market value this year. Meanwhile, European stocks rallied off a two-year low after the German court rejected lawsuits aimed at blocking the country from joining efforts to aid Greece and other nations. Germany's DAX rose more than 4 percent.

The total put-to-call ratio for all listed options finished at 0.91 on Wednesday, below the 22-day moving average of 1.15. The ratio is the lowest level in one month when the ratio is adjusted for ex-dividend trading in call options.

Shares of energy companies, a sector closely tied to economic growth, were also higher, while the price of domestic crude futures rose $3 to a five-week high Wednesday,

Yahoo gained 5.4 percent to close at $13.61 after its chairman, Roy Bostock, abruptly fired Chief Executive Carol Bartz on Tuesday, ending a tumultuous tenure marked by stagnation and a rift with Chinese partner Alibaba.

Darden Restaurants was the largest loser on the S&P 500, falling 3.6 percent to $44.54 a day after the operator of the Red Lobster and Olive Garden restaurant chains warned that Hurricane Irene hurt its fiscal first-quarter earnings.

Nvidia rose 8.1 percent to $14.25 a day after the chipmaker forecast 2013 sales that topped market expectations.

Economic Growth Remains Tepid Say Fed

The economy remains sluggish and even softened in some areas of the country, as volatile stock markets and sputtering factory activity weighed on growth, the Federal Reserve said on Wednesday.

"Economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity," the Fed said in its Beige Book collection of anecdotal reports of economic conditions in the Fed's 12 districts.

A sharp decline in stock markets since mid-July and increased economic uncertainty have made businesses gloomier about the outlook in several regions, the Fed said. Growth was modest or slight in five districts through late August, while the remaining seven described activity in terms such as "very subdued" or expanding "more slowly."

Consumer and business confidence fell sharply last month after a bruising political battle over the budget led Standard & Poor's to strip the nation of its triple-A credit rating and sent stock markets tumbling. Employers responded by putting the brakes on hiring.

The question now is whether the Fed, which eased monetary policy in early August by stating that it expected to hold overnight interest rates near zero at least through mid-2013, could ease further at its next meeting, on September 20-21, despite clear divisions on its policy committee.

The Fed's Beige Book showed a slightly less downbeat mix of modest or weak growth in some districts balanced against slowing or minimal growth in others than did the prior report that covered the period into early July.

Two Fed officials on Wednesday said further monetary stimulus might prevent the economy from running out of steam altogether. Chicago Federal Reserve Bank President Charles Evans, one of the central bank's more growth-focused doves, repeated his view that the Fed should consider promising to keep rates low until unemployment drops to at least 7.5 percent.

"We need to take strong action now," he told the European Economics and Financial Center in London. With inflation expected to stay below the Fed's 2 percent target in the medium term, the case is clear for more aggressive easing, he said.

"Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation."

"If 5 percent inflation would have our hair on fire, so should 9 percent unemployment," Evans said.

The president of the San Francisco Fed, John Williams, also allied himself with the dovish wing on Wednesday, saying the economy was like a patient facing heightened risks. Doctors would likely "offer a measure of protection against further deterioration in the patient's condition and perhaps help him get back on his feet," he said.

While the Fed may be inclined to ease policy further, some officials have made clear they stand opposed. In addition, Evans' idea of offering a rate vow tied to the level of unemployment does not appear to enjoy widespread support. Even Williams, who suggested the economy might need further help from Fed policies, stopped short of endorsing Evans' suggestion of a direct link to the jobless rate, which he said could be confusing.

Instead, the central bank is more likely to move to rebalance its portfolio to weight its bond holdings more toward longer-term securities. That could push longer-term interest rates lower, perhaps stimulating mortgage refinancing, loans for car purchases, or business investment.

The Beige Book, which was prepared for the next Fed meeting, said consumer spending increased in most districts, but spending on items besides cars was flat or down in several places. Manufacturing conditions were mixed across the country and had slowed in many districts, it said.

Hard-hit residential real estate markets remained weak overall. A separate report on Wednesday showed demand for U.S. home loans fell for a third straight week last week although mortgage rates fell to or near record lows. The Fed said price pressures edged lower in recent weeks, although retail prices rose in some districts. Labor markets were generally stable and some districts reported modest gains.