By Carla Mozee, MarketWatch
LOS ANGELES (MarketWatch) -- The Federal Reserve is expected to
unveil more stimulus for the economy next week, but the contentious
talks in Washington over tax hikes and spending cuts will remain
the primary focus for U.S. equity investors.
The fiscal-cliff "headlines will continue to be the ones that
will roil the market or make it happy, either way," said Bill
Stone, chief investment strategist at PNC Wealth Management, in a
telephone interview.
Retail sales for November are also due next week, with further
reads from the sector to come in the form of quarterly reports from
discounter Dollar General Corp. (DG) on Tuesday and Costco
Wholesale Corp. (COST) on Wednesday. Each is expected to post gains
in earnings and sales from the year-ago period.
Software maker Adobe Systems Inc. (ADBE) is scheduled to release
its latest quarterly report on Thursday, and mining-equipment
company Joy Global Inc. (JOY) will release its results on
Wednesday. In the semiconductor sector, Texas Instruments Inc.
(TXN) will issue a mid-quarter update on Monday.
Twists and turn
The Federal Open Market Committee begins a two-day meeting on
Tuesday, with a monetary-policy announcement and Chairman Ben
Bernanke's press conference due on Wednesday.
The Fed is expected to unveil more stimulus for the economy as
its Operation Twist program expires. Twist, which was started in
September of last year, was aimed at lowering mortgage and
corporate bond rates through buying long-term debt and selling
short-term holdings.
"With the Fed running out of short-term securities to sell," the
market is expecting "that there will be some new version of
monetary stimulus and monetary easing," said Katie Nixon, chief
investment officer of wealth management at Northern Trust. "More
asset purchases clearly are what the market has been looking for
and continued injections of liquidity are what are providing, I
think, a nice tailwind generally to risky assets."
The Fed is expected to say it will add $40 billion to $45
billion per month in purchases of long-term Treasuries to its third
round of quantitative easing, or QE3, when Twist ends, according to
Raymond James. The Fed is also expected to hold interest rates at
the record low range of 0% to 0.25%.
The Fed meeting notwithstanding, Wall Street remains foremost on
fiscal-policy watch as Democrats and Republicans try to hammer out
a deal to avert the fiscal cliff, or the $600 billion in tax
increases and spending cuts set to go into effect on Jan. 1. The
two sides on Friday were no closer to announcing a resolution, with
House Speaker John Boehner saying little progress has been made in
the negotiations.
"There's inertia that's set in right now, with investors and
corporations [...] waiting for some signal from Washington in terms
of what the future may hold so that they can plan appropriately,"
said Nixon.
PNC's Stone said the progress made by lawmakers will likely
drive the direction of stocks as the end of 2012 approaches. He
said there's a 50% chance that a fiscal-cliff deal won't be reached
until early next year.
If lawmakers "say we've got the framework of a deal and we can
come right back and finish it out, it might be positive," for the
market, he said. "If they leave it with a 'no middle-of-the-road
place to meet,' I think that has a good chance to weigh on the
market."
Northern Trust's Nixon said investors have been sitting on cash
and on low-yielding fixed-income securities, "because they don't
want to push out on the risk spectrum necessarily if we do careen
over the fiscal cliff and the U.S. does go into recession in the
first part of next year."
The fiscal cliff stems from a deal signed by President Barack
Obama in August 2011 to end fighting between Democrats and
Republican over raising the federal debt ceiling. Republicans want
to extend Bush-era tax cuts for the wealthiest 2% of Americans,
saying more revenue could be raised by curbing tax deductions for
top earners. The White House argues not enough revenue could come
from that source without also ending deductions that are widely
used by middle-class Americans.
Some companies have been taking defensive action, with Costco
among those that have launched special dividends in anticipation of
a jump in taxes on dividends.
Worries on Main Street about the fiscal cliff appeared to have
hit consumer sentiment this month. On Friday, the preliminary
University of Michigan-Thomson Reuters consumer-sentiment index
fell to 74.5, far below the 82.0 reading expected by a MarketWatch
poll of economists. The result represented the biggest one-month
drop since March 2011.
U.S. stocks finished mostly higher on Friday following a
better-than-expected November jobs report.
For the week, the Dow Jones Industrial Average (DJI) rose 1%.
The S&P 500 index (SPX) edged up 0.1%, while the Nasdaq
Composite index (RIXF) fell 1.1%.
Data due
Retail sales for November, due Thursday, are expected by
analysts polled by MarketWatch to rise 0.2%. Retail sales in
October fell a seasonally adjusted 0.3%, the sharpest amount since
June, with the result reflecting the impact of Hurricane Sandy and
weak consumer demand in some areas including the auto sector.
"With 70% of [gross domestic product] tied up in consumer
spending, there's no doubt that that matters," said PNC's Stone of
the upcoming report. In the wake of Sandy, "you should see some
sort of rebound" relative to last month's figures.
But Nixon at Northern Trust said it may be difficult for the
market to assess macroeconomic data right now: "We have the dual
issues of the fiscal cliff and Hurricane Sandy [...] and these two
issues can't be discounted."
On Thursday, weekly jobless claims and a report on wholesale
costs in November is slated to arrive. Investors on Friday will get
a look at prices paid by consumers last month for food, gasoline
and other goods, and the government will provide a snapshot of
industrial output in November.
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