Bill Nichols Comments: US stocks fall on final day of trading after a year of gains

January 5, 2015, NASDAQ

Stocks turned lower on the final trading day of the year, capping an otherwise strong year for stocks that puts the Dow on course to post its sixth consecutive year of gains.

Major benchmarks kicked off a quiet session with modest gains, but reversed course by midday. The Dow Jones Industrial Average eased 39 points, or 0.2%, to 17944 recently, while the S&P 500 index fell six points, or 0.3%, to 2075. The Nasdaq Composite Index declined four points, or 0.1%, to 4773.

The reversal didn’t appear prompted by a single piece of news. With volumes so thin, traders say the broader market is more likely to be swayed by smaller trades, according to traders. An early report from the Labor Department showed jobless claims rose by more than expected, up 17,000 to 298,000 in the week ended Dec. 27. Economists surveyed by The Wall Street Journal had expected 290,000 new claims. Claims remain near postrecession lows.

Wednesday’s slide concludes another banner year for U.S. stocks. Buoyed by a steadily improving U.S. economy, expanding corporate profits and an accommodative Federal Reserve, the Dow is on track to rise 8.3% for 2014. Its six- year rally is the longest since the nine straight years of gains that ended in 1999.

The S&P 500 is tracking a gain of 12.4%, its third straight year of gains.

The gains came amid a relatively subdued year for the stock market. Following a 30% gain for the S&P 500 in 2013, investors expected greater levels of market volatility this year. They also braced for a stumble in the form of a pullback of 10% or more.

But with the exception of a market hiccup in January and October, stocks rose slowly and steadily. The Dow closed at a record 38 times, while the S&P 500 did so 53 times. Markers of volatility fell to multiyear lows over the summer, while trading volumes slumped.

"The market just seems to keep rallying," said Scott Armiger, chief investment officer at Christiana Trust, which oversees about $9 billion out of Wilmington, Del. "It’s been an amazing year."

Below the surface, some signs of turbulence emerged. Many investors were caught flat-footed by the steady decline in bond yields, which led to a surprise surge in income-oriented investments like utility stocks. High-growth corners of the market like biotechnology stocks saw big swings. A surprise plunge in oil prices dealt a blow to energy companies and tripped up a popular bet on the U.S. shale boom.

Still, many investors say the same factors that boosted stocks this year aren’t going anywhere. Economists expect the U.S. economy to continue to firm in 2015. Earnings should continue to expand, with companies in the S&P 500 set to post a 7.2% increase in profits next year, according to analysts polled by FactSet.

"There’s a lot to be bullish about," said David Seaburg, head of sales trading at Cowen and Co. in New York. " People are generally positive about the backdrop of what’s happening from an economic perspective, from a job growth perspective."

Market watchers say 2015 won’t be without its challenges. Stocks are expensive compared with historical levels, and the Federal Reserve is widely expected to raise interest rates sometime in the next year. While the U.S. economy is growing at an expanding clip, Europe’s is showing signs of trouble and China’s long-booming economy has been cooling.

"The U.S. is outperforming the rest of the world," said Bill Nichols, head of U.S. equities at Cantor Fitzgerald. " But have stocks run too far too fast? Even with good fundamentals and better economic data and stronger earnings…is it time for a pause?"

While the Federal Reserve is expected to raise interest rates next year, Ed Hyland, a global investment specialist for J.P. Morgan Private Bank, said a slow-and-steady approach to raising rates shouldn’t diminish the appeal for U.S. stocks.

"It’s fundamentally good because it means that the Fed is removing this extraordinary easing and they’re only doing that because they feel that the economy is able to generate self-sustaining growth," he said. "That will be good for corporate earnings," he added.

Market activity was quiet on Wednesday, with traders noting that many investors have already closed up shop for the year. The U.S. stock market will be closed Thursday for the New Year’s holiday.

The yield on the 10-year Treasury note inched down to 2.172% from 2.191% on Tuesday. Yields fall as prices rise. The euro traded at $1.2100, slightly lower than $1.2157 late Tuesday.

Stock markets were closed in some countries, including Germany and Japan. The Stoxx Europe 600 index rebounded from a prior-day fall, up 0.4%.

In Asia, the Shanghai Composite Index rose 2.2% and notched a yearly gain of 53%. Hong Kong’s Hang Seng Index rose 0.4% and gained 1.3% for the year. Investors also eyed a sluggish reading on Chinese manufacturing. The final reading of the HSBC Manufacturing Purchasing Managers’ Index fell to a final reading of 49.6 in December from 50 in November, indicating a contraction in activity.

In commodity markets, crude-oil futures continued their decline, down 2% to $53.04 a barrel. Gold futures lost 1% to $1188 an ounce.

In corporate news, China’s Fosun International has agreed to buyMeadowbrook Insurance Group for about $433 million. The offer price of $8.65 a share represents a 21% premium over Meadowbrook’s closing price of $7.13 on Tuesday. Meadowbrook shares jumped 18%.

Shares of American Eagle Energy Corp. plunged 19% after announcing Wednesday that it suspended drilling operations and likely won’t resume until oil prices improve. The company is the latest to suffer from the sustained decline in oil prices.

NephroGenex Inc. shares soared more than 200% after announcing positive safety study results for its diabetic nephropathy treatment Pyridorin.