The Markets This Week

December 9th, 2013

Good news was once again actually regarded as good news—at least for a day.

Friday, stocks jumped sharply, bolstered by positive economic data. That took the market from a week headed for a sharp loss to one that finished mixed.

In previous weeks, a perverse logic—still in evidence as late as Thursday—had gripped investors, with the market sometimes sliding on occasional news of strong economic figures. Investors fear that such data will push the Federal Reserve to begin its intended removal of its bond-buying sooner rather than later. That easy-money policy has helped pushed stocks to record highs this year.

Most investors appear to believe the Fed will begin the taper in the first quarter and not at the coming Federal Open Market Committee meeting Dec. 17-18, but there’s a residual fear of that.

After eight consecutive weekly gains, the Dow Jones Industrial Average fell 0.4% or 66 points to 16,020.20. The Standard & Poor’s 500 lost less than 1 point.  The Nasdaq Composite Index rose slightly, 0.1% or three points, to 4062.52.

The data last week collectively showed one of the strongest economic pictures in some time. The gamut of figures—jobs, manufacturing, consumer sentiment, gross domestic product—all suggested a modestly accelerating U.S. economy.

The switch in the market’s reaction to the good news suggests it previously was more concerned about the economy than the Fed tapering, says Malcolm Pulley, president of Stewart Capital Advisors. In other words, investors feared the stimulus reduction would begin when the economy wasn’t ready. But the slew of solid data was strong enough to get investors thinking it is.

Friday, the Labor Department said payrolls rose by 203,000 jobs in November, and the unemployment rate fell to 7%, the lowest in five years. The consensus, respectively, was for 185,000 jobs and a 7.2% jobless rate. Thursday, the third-quarter annualized GDP was revised up to a solid 3.6% from 2.8%, and well above the 3.1% consensus.

Much of that GDP rise was due to rising inventories, points out Pulley, and if those inventories aren’t bought up in the first quarter, the market could be disappointed.

As for tapering, Marc Pado, president of DowBull, an investment advisor, says Friday’s reaction also means the market is getting both more comfortable and certain of the coming tapering. The economy looks to be getting “a little bit of traction…and a March taper is pretty certain now,” he adds.

The market strategist adds that while some think a December move is still possible, the Fed will want to give Janet Yellen, set to succeed Chairman Ben Bernanke on Feb. 1, time to settle in without the strum and daring that a December tapering could elicit.

Indeed, the only thing that could prevent a strong second half of December is a surprise tapering by the Fed next week (Source:  Barrons Online).

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