Stocks See Some Volatility But Ultimately Finish With Strong Gains - U.S. Commentary

Tue. January 06, 2009; Posted: 04:22 PM

(RTTNews) - While stocks saw some volatility over the course of the session, the major averages ultimately ended Tuesday's trading firmly in positive territory, although well off their highs. The choppy trading came as investors responded to a mixed bag of economic news and remarks by President-elect Barack Obama.

On the economic front, reports on service sector activity, factory orders, and pending home sales painted a mixed picture of the economy.

The Institute for Supply Management said that its index of activity in the service sector rose to 40.6 in December from a record low of 37.3 in November, although a reading below 50 still indicates a contraction in the sector. Economists had expected the index to edge down to 37.0.

At the same time, the government issued its report on November factory orders, showing a decline of 4.6 percent following a revised 6.0 percent decrease in October. Factory orders were expected to decline 2.6 percent in November.

Similarly, weakness was also seen in the pending home sales report that was released by the National Association of Realtors. Pending home sales fell by 4.0 percent to a record low in November, while analysts had expected pending sales to fall by a more modest 1.0 percent.

In other news, President-elect Barack Obama said Tuesday that he expects to inherit a $1 trillion federal deficit, a burden that will likely extend into the next few years.

Subsequently, Obama said he and his team want to instill a "sense of responsibility" about future budget choices. That "sense of responsibility" includes a ban on all earmarks from the economic stimulus package he hopes to sign soon after he takes office on January 20th.

The president-elect met with both Democrat and Republican lawmakers Monday to discuss his proposed package, aiming at a swift passage following his inauguration.

Meanwhile, the forecast from members of the Federal Open Market Committee deteriorated significantly in the period between their October and December meetings, the minutes from the FOMC's December meeting revealed.

The policy-making arm of the Federal Reserve is expecting economic weakness to extend throughout 2009, a bleak outlook that prompted them to slash the federal funds rate to record low levels.

"Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010," the Fed noted in the minutes.

By the close of trading, the major averages were well off their best levels of the day, but they held onto strong gains. The Dow closed up 62.21 points or 0.7 percent at 9,015.10, the Nasdaq closed up 24.35 points or 1.5 percent at 1,652.38 and the S&P 500 closed up 7.25 points or 0.8 percent at 934.70.

Sector News

The upward move by the broader markets reflected significant strength in a variety of sectors. Steel and computer hardware stocks were some of the best performers of the day.

Within the computer hardware sector, one of the biggest gains was shown by Western Digital, which climbed sharply and ultimately closed 19.1 percent higher on the day. With the gain, Western Digital rose to its best closing level in over a month and a half.

Other noteworthy advances were shown by real estate, brokerage, and electronic storage stocks. Commodity-related stocks also posted notable gains but ended the day significantly off their highs.

At the other end of the spectrum, tobacco and utility stocks spent most of the session posting some of the widest losses and ultimately closed that way. The Amex Tobacco Index and the Philadelphia Utility Index closed down 1.7 percent and 1 percent, respectively.

Dow Components

Following the lead of the broader markets, a significant majority of the blue chip stocks ended Tuesday's session posting noteworthy gains. Hewlett-Packard was one of the biggest gainers.

American Express (AXP | Quote | Chart | News | PowerRating) also turned in a rather impressive performance, ending the trading day with a gain of 5.6 percent that took the stock to its highest closing level in almost a month.

Other Markets

In overseas trading, the major markets in the Asia-Pacific region ended mostly higher on Tuesday, with the Japanese Nikkei 225 index closing up 0.4 percent.

The major European markets also ended the session with notable gains. The French CAC 40 Index and the German DAX Index closed up 1.1 percent and 0.9 percent, respectively, while the U.K.'s FTSE 100 Index posted a gain of 1.3 percent by the end of the trading day.

In the bond market, treasuries saw some volatility in late-day trading after the Treasury revealed high demand for an auction of ten-year inflation-protected bonds. The yield on the benchmark ten-year note eventually closed up 1.7 basis points at 2.505 percent after reaching a high of 2.614 percent.

Looking Ahead

Economic data may attract some attention on Wednesday, with ADP due to release its report on private sector employment in the month of December. The report may provide some insight into the Labor Department's monthly employment report due to be released on Friday.

Traders may also keep an eye on the release of weekly reports on mortgage applications and oil inventories as well as a speech by Kansas City Federal Reserve President Thomas Hoenig.

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