As oil plunged, the markets embraced the Fed's pause, technology stocks and a strong U.S. economy to end the week on high note. The Dow Jones Industrial Average made a second all-time high of the week Friday on the heels of stronger-than-expected retail sales report for December. The index finished the week up 1.3% to close at 12,556.08 on Friday. The S&P 500 closed up 1.5% for the week at 1430.73, a new six-year high. But the Nasdaq Composite had the most dramatic rise, climbing 2.8% in first full week of the year to a new six-year high. Investors fell back in love with technology, as Apple Computer's ( AAPL) new iPhone symbolized high hopes for the sector. Cisco Systems ( CSCO) and the options backdating scandal interrupted the party. Cisco decided to sue Apple for trademark infringement, and the Washington Post and Wall Street Journal reported that federal regulators are investigating a 2001 options grant to CEO Steve Jobs. Those issues, and profit-taking after a big run, weighed on Apple on Thursday and Friday, but the shares still rose 11.3% this week. The bulls were further enthused by a strong start to earnings season with stronger-than-expected results and/or guidance from Alcoa ( AA), Genentech ( DNA) and Sears Holdings ( SHLD), most notably. Meanwhile, the unwinding of last year's window-dressing continued. "Sectors that had been the strongest in 2006 and chased at year-end posted the worst results (energy, telecom, materials)," writes Brian Belski, U.S. sector strategist at Merrill Lynch. "Traditionally 'growthier' areas (discretionary, tech) outpaced deep cyclicals."
Shares of other technology companies also rose sharply on the week. Intel ( INTC), Google ( GOOG), Microsoft ( MSFT) and Yahoo! ( YHOO) jumped between 3.7% and 6.2% each on the week. Even negative news such as earnings warnings from companies such as SAP AG and Advanced Micro Devices ( AMD) didn't hamper the sector's rally. Shares of AMD fell 9.5% on Friday, while SAP's shares gained 3.1% Friday after shedding 10.4% Thursday. The money that fueled the tech rally rotated out of energy stocks as light, sweet crude oil fell 4.7% in the week. Shares of Exxon Mobil ( XOM), Chevron ( CVX), and ConocoPhillips ( COP) slipped this week. The shares rebounded Friday with oil, which bounced 2.1%, but they didn't make back the week's losses. The drop in oil underscored a week filled with data that revealed the economy landed softly and has actually taken off again. Lower oil will help keep inflation down, offsetting the strong labor market and allowing the Fed to stay on hold. "We had the landing in the third quarter of 2006," says Michael Darda, chief economist at MKM Partners. "The debate about the slowdown is here and gone." Darda predicts fourth-quarter gross domestic product growth at 3.5%. Darda's estimate is on the high side of consensus, but many other economists increased their fourth-quarter GDP estimates this week given evidence of strong export growth, which revealed a narrower trade deficit, robust retail sales for December and more strong employment data. Many now believe the fourth quarter of 2006 will reflect an acceleration of economic strength, which puts the Fed far from any rate cuts.
Excluding autos, retail sales in December rose 1%, double the consensus estimate of 0.5%. The December figure followed a surprising 1.1% gain in November. The trade deficit narrowed to $58.2 billion in November, from $58.2 billion in the prior month, and initial jobless claims plunged 26,000 to 299,000 claims in the month. Credit Suisse's chief economist Neil Soss increased his fourth-quarter GDP estimate to 3% from 2.4% last week. GDP in the third quarter of 2006 grew at 2%. "The message from the December retail sales report resonates loud and clear: The housing slowdown and cratering in mortgage equity withdrawal did not cause consumer spending to roll over in 2006, contrary to the fears of many market commentators." The bond market is facing the Goldilocks reality with some pain. Treasury bond yields rose throughout the week, leaving the 10-year note yielding 4.77%, up 12 basis points from last week. The booming M&A and private equity industry also supported stocks this week. Bidders were upping their antes. Rumors swirled about a competing private equity bidder for real estate investment trust Equity Office Properties ( EOP). The Dolan family increased its bid for Cablevision ( CVC), and US Airways ( LCC) increased its bid to take over Delta Air Lines ( DALRQ.PK). Next week brings Fed Chairman Bernanke's testimony to the Senate Budget Committee and a heavy slate of economic data, including the producer and consumer price indices. Barring a sour batch of earnings reports, don't expect the bulls to loosen their grip on stocks -- the data are expected to be benign, and the Fed chairman is likely to stay on message: vigilant on inflation and data-dependent.