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Second Weekly Loss on Low Volume, Federal Open Market Committee Concerns

Stocks experienced another down week, driven largely by low volume, anticipation of a budget deal, and investor caution before the Federal Open Market Committee (FOMC) meeting. For the week, the S&P 500 lost 1.65%, the Dow fell 1.65%, and the Nasdaq lost 1.51%.[1]

Several narratives drove the action last week. The House passed a breakthrough budget deal that will avoid a government shutdown in January and blunts the next round of automatic sequestration cuts. The modest deal won’t make much of a dent in the U.S. deficit and doesn’t deal with the debt ceiling, meaning that we could see another battle when it needs to be increased by Congress in early spring. The bill will go to the Senate next, where it’s expected to pass despite the objections of some political groups, who would prefer to see government spending cuts included.[2] It appears that investors had two concerns about the bill last week: Though Senate approval of the bill seems certain, there’s still an opportunity for opponents to derail the process, pushing the deal into the New Year and raising the risk of another shutdown. On the other hand, passage of the bill may increase the possibility of the Fed making a tapering announcement at this week’s meeting.

Last week’s initial jobless claims spiked unexpectedly to 368,000 (expectations had ranged from 300,000-315,000); however, the Labor Department said that it is still experiencing problems with seasonal adjustments, meaning that the report is not as disappointing as it may appear.[3] Another factor in the poor performance last week is that bullish sentiment has been running so high in recent weeks that a pullback was almost certain. Though it’s disappointing to see the rally stumble so close to the end of the year, keep in mind how far we’ve come in 2013: to date, the S&P 500 has gained 24.5%, the Dow has increased 20.2%, and the Nasdaq has grown 32.5%.[4] Depending on the outcome of the budget bill debates and the FOMC meeting, it’s possible that markets could renew the rally, giving investors another bump before year-end.

The Fed’s FOMC meeting will be in focus this week as investors wait to see whether the central bank will send out 2013 with a bang or a whimper. It’s hard to call the odds on whether the Fed will announce intentions to scale back its stimulative bond-buying programs now that the economic outlook is brightening, or if it will wait until next spring. Currently, general sentiment expects the Fed to delay the taper until next year, but we won’t know for sure until the official announcement on Wednesday. Investors will also be watching Washington carefully as the Senate begins debating the budget deal on Tuesday. The final Senate vote on Janet Yellen for the next Fed chair will also be this week.[5]

ECONOMIC CALENDAR

Monday: Empire State Mfg. Survey, Productivity and Costs, PMI Manufacturing Index Flash, Treasury International Capital, Industrial Production

Tuesday: Consumer Price Index, Housing Market Index

Wednesday: Housing Starts, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Chairman Press Conference

Thursday: Jobless Claims, Philadelphia Fed Survey, Existing Home Sales

Friday: GDP

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and  Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES

Wholesale prices show muted inflation pressure. Producer prices fell for the third straight month in November, indicating that inflation is still weak. Falling gasoline prices caused much of the downward trend, which will likely factor into the Fed’s tapering decision this week. Persistently low inflation can contribute to slow economic growth.[6]

Strong November retail sales boost economic outlook. U.S. retail sales data showed solid growth in November, increasing 0.7%, as Americans stepped up their spending on a wide range of goods. November’s increase was the largest in five months and could portend a strong holiday shopping season.[7]

Import prices fell in November for second straight month. Falling food and petroleum prices led to lower import costs, indicating that imported inflation is also well below target levels. Soft import inflation also points to weak demand overseas, which is keeping prices down.[8]

Auto industry showing strengthening sales. Solid November sales data and unexpectedly strong Black Friday performance indicates that consumers are opening their wallets for new cars. Auto financing data shows that Americans took out a record number of car loans in the third quarter.[9]

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[1]  http://www.briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-december-9-2013.htm

[2]  http://www.reuters.com/article/2013/12/13/us-usa-fiscal-idUSBRE9BA0WN20131213

[3]  http://www.businessweek.com/news/2013-12-12/jobless-claims-in-u-dot-s-dot-surge-in-week-after-thanksgiving-holiday

[4]  Google Finance

[5]  http://www.cnbc.com/id/101272448

[6]  http://www.reuters.com/article/2013/12/13/us-producerprices-idUSBRE9BC0HJ20131213

[7]  http://www.reuters.com/article/2013/12/12/us-economy-jobless-idUSBRE9BB0KC20131212

[8]  http://www.reuters.com/article/2013/12/12/us-usa-economy-prices-idUSBRE9BB0KR20131212

[9]  http://www.cnbc.com/id/101244162

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