Stocks may get a lift into the Christmas holiday weekend, after a Congressional deal to extend payroll tax breaks and unemployment benefits.
While a positive, the market is not expected to move dramatically higher on the news. House Speaker John Boehner announced after Thursday’s market close that Congressional leaders agreed to extend the payroll tax cut by two months and begin working on a year long extension.
“You may get a small pop… It wasn’t a negative catalyst when they didn’t have a deal,” said Jordan Kotick, head of global technical strategy at Barclays.
“The market is chewing on bigger issues,” he said.
Art Cashin, director of floor operations of UBS, agrees but says the market could move higher into the year end, unless Europe comes back into focus as a problem. Traders and analysts had been expecting a year-end “Santa rally,” which so far has not really materialized.
Stocks finished higher Thursday, with an 0.8 percent gain taking the S&P 500 to 1,254, just three points below where it started 2011. The Dow rose 61 points Thursday to 12,169, and it is now up 5 percent year-to-date.
“It’s a question of whether everyone wants to stay on Santa’s sled,” said Cashin. He said traders are still fixating on Europe and concerns have not gone away, even with the positive reaction to a new European Central Bank lending program that injected liquidity into the European banking system this week.
“Next week, you might get more discussion about whether the ECB thing is as meaningful as they took it to be,” he said.
Traders are watching a few economic reports Friday, including November durable goods orders and personal income and spending, all at 8:30 a.m. EST. There are new home sales at 10 a.m.
”The durable number should show a little bit of a recovery because the first month of the quarter the number always tends to be weak,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “I think you’ll see some improvement in orders. The income and consumption numbers will be useful in giving us numbers on the (fourth) quarter.” So far, the fourth quarter is tracking above 3 percent.
Revisions to third quarter GDP, reported Thursday, showed the economy expanded at a rate of 1.8 percent in the third quarter, down from the 2 percent previously estimated. The reduction was due to weaker consumer spending, which was revised down to 1.9 percent from 2.8 percent, in part because health care spending was weaker than in earlier estimates. For that reason Friday’s income and consumption data takes on even more importance.
Thursday’s data also included a surprise drop in weekly jobless claims to 364,000, the best level since April, 2008. The claims figure showed a surprising decline for a second week.
LaVorgna said he needs to see a few more weeks of the improvements in claims before considering it a consistent enough pattern to significantly impact employment data. However, the improvements have encouraged economists who see a slight pickup in hiring activity.
“The seasonal (impact) on claims tends to be very large two times a year – July and August – and December and January. So, you have to be careful overanalyzing these numbers,” said LaVorgna.
What Else to Watch
Bond market participants, expected to be few and far between Friday, are likely to focus on a story in the Wall Street Journal that says the Fed could signal it will not raise rates until 2014. The story appeared Thursday evening, and also said Fed officials are increasingly uncomfortable with their August statement that they will hold rates exceptionally low through mid-2013.
Some Fed watchers have been expecting this, but the article could convince more market participants an even longer-term, low rate policy is in store. The article also discussed how the Fed may announce its new communications strategy at its January meeting, also expected by Fed watchers.
RBS chief Treasury strategist Bill O’Donnell said earlier Thursday that he expects the Fed to move on to another round of quantitative easing by April. He said the main reason yields are in their current low ranges is because of the Fed’s August statement.
The 10-year yield edged down to 1.95 percent Thursday, but it had touched a low this week of 1.796 percent. “This 1.8 level is the level where it tends to run out of oxygen… You’re at the extremes,” he said.
O’Donnell expects Treasurys to trade much as they have this week into the year end. “Everyone seems to be dead set thinking what we have in the fourth quarter is Peter stealing from Paul… People are looking for much weaker growth of 1.5 to 2 percent in the first half,” he said.
The stock market is open for the full day Friday, but the bond cash and futures markets close early. All floor trading at NYMEX closes by 1:30 p.m. EST but electronic trading continues until 5:15 p.m.
World is Not Flat
The S&P 500 has been on both sides of unchanged for the year, in the past week, and it is now barely changed as the New Year approaches.
“At the end of the day, for statistical purposes it’s essentially flat,” said Kotick. “Does the S&P matter? Or is it the fact that Europe is down 20 percent?” He also pointed to big declines in Indian and Chinese markets.
Kotick said the S&P’s performance is impressive given all the turmoil in the past year and the unexpected events, like the Japanese earth quake and tsunami, the Arab spring, and downgrade of the U.S. credit rating. Add to that the European sovereign crisis.
French stocks are down 19 percent for 2011, while the Greek stock market is down 54 percent and Portugal is down 49 percent. India is down 23 percent and Shanghai is down 22 percent. Brazil’s stock market is down 17 percent.
Kotick said stocks will probably drift marginally higher into the year end. “There’s no liquidity, there’s no volume. Professionals closed the books a couple of weeks ago,” he said.
However, the beginning of the year will be different. “People will be more cautious. People are going to start off ready to go, but they will be more wait and see, more than in recent years,” he said. Europe’s debt crisis will be a reason for caution, as will the U.S. election.
Early January is usually a time when new money is put to work, lifting stocks in the early days of the year.
“I hope next year we don’t have so many unexpected events,” he said.
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