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Despite Fiscal Cliff, Stocks Seen Ending Year Higher

By: Investor's Business Daily
Posted: 12/7/2012 4:49:00 PM
Referenced Stocks: AAPL;CL;WMT;XLK;XLP

Investors turned defensive Friday, bidding up consumer staples stocks while shunning the high-growth tech sector following a surprisingly strong jobs report.

Fears over the fiscal cliff don't appear to be hurting employment growth, but they're weighing on consumers -- the key drivers of economic growth. Thus the favor being shown consumer staples companies, which tend to have more reliable earnings in a sluggish economy.

In afternoon trade,Consumer Staples Select Sector SPDR ( XLP ) added 0.64% to 36.75.Wal-Mart Stores ( WMT ) andColgate-Palmolive ( CL ) fronted the ETF's gains, rising 0.98% and 1.50%, respectively. XLP is trading near a 52-week high and above its 50- and 200-day line, indicative of a strong uptrend.

Technology Select Sector SPDR ( XLK ) lost the most among the S&P sectors. It shed 0.47% to 28.78, owing to a 2% decline in tech giantApple ( AAPL ). Both the XLK and Apple shares have fallen below both their 50- and 200-day lines, which means they're in a strong downtrend.

SPDR S&P 500 (SPY) ticked up 0.26% to 142.37.SPDR Dow Jones Industrial Average (DIA) rose 0.57% to 131.47. Both are struggling to regain their key 50-day lines and are in weak uptrends.

PowerShares QQQ (QQQ), tracking the 100 largest nonfinancial stocks on the Nasdaq, fell 0.5% to 64.98. It's in a strong downtrend and has failed to regain the 50-day line along with SPY and DIA because of its 20% weighting in Apple.

"In spite of the politicians, we remain bullish. Markets are going higher, maybe much higher," David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Fla., wrote in a client note.

He believes the U.S. will see slow growth, low interest rates and low inflation the rest of the decade. He says stocks are cheap and sees the S&P 500 reaching 1,450 to 1,550 by year's end, translating to 145.00 to 155.00 a share for SPY, up 2% to 9% from current levels. The S&P's 2% dividend yield outweighs the risk-free 10-year Treasury note yields of 1.6%.

Upbeat Jobs Report

The country added 146,000 jobs in November. The Bureau of Labor Statistics reported that Hurricane Sandy didn't significantly hurt employment the past month. Employment rose most in retailing, professional and business services, and health care. This suggests companies are hiring despite worries over the fiscal cliff. The headline unemployment rate eased to 7.7% from 7.9%. However, this was because more people gave up looking for work.

"The trend in the unemployment rate has clearly been downward, with job growth strong enough given slowing in labor force growth," Jim O'Sullivan, chief U.S. economist at High Frequency Economics wrote in a client note. "(Thursday's) claims report also showed no new weakening after hurricane effects had dwindled. The labor market numbers continue to look stronger than the GDP data."

Cliff Erodes Sentiment

Consumers are a lot less cheerful this month than they were in November, according to the latest Reuters/University of Michigan Consumer Sentiment survey. The Michigan index fell 8.2 points to 74.5 in early December from 82.7 in November. This followed a tiny 0.1-point gain in the index in November.

"Slowly, but surely, consumers are starting to become more aware of the so-called fiscal cliff and its implications," Leslie Levesque, senior U.S. economist at IHS Global Insight wrote in an analysis of the survey. "It was a matter of time before the thought of higher taxes crept into consumers' outlook.

"This alters perceptions of future financial situations, job prospects and the health of the economic recovery. Now sitting at its lowest level since last December, the economic outlook index was stripped of gains accumulated over the year."

But Levesque expects holiday retail sales to remain strong this year, increasing 3.9% over the November-December period last year.

IHS projects fourth-quarter gross domestic product to expand merely 0.5% after growing 2.7% in the third quarter. The path to growth thereafter will depend on how lawmakers resolve the fiscal cliff.

Here's an overview of IHS chief U.S. economist Nigel Gault's expected results from fiscal cliff negotiations:

1. Current income-tax rates for households earning less than $250,000 a year will be left in place.

2. For upper-income households, ordinary income-tax rates will return to their pre-Bush levels in 2014, and there will be restrictions on deductions as well, starting in 2013 but phased in gradually.

3. The top rate of tax on both capital gains and dividends will rise from 15% to 20%, beginning in 2014.

4. Payroll tax cuts and emergency unemployment insurance benefits are extended for another year (then gradually phased out).

5. The personal income-tax hikes add up to around $1.2 trillion over 10 years, but there is little extra tightening in 2013 itself.

6. There will be modest cuts to entitlement spending and perhaps also to discretionary spending, the details of which will be settled later in 2013.

If there's a stalemate and tax increases and across-the-board spending cuts go into effect automatically, U.S. GDP will shrink 3.8%, sending the country back into recession.

Gault expects the Federal Reserve will continue buying $45 billion a month in long-term Treasuries and keep the federal funds rate near zero through 2015.

Follow Trang Ho on Twitter @TrangHoETFs .