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SENTIMENT WEIGHS ON MARKETS By WSS Research Team

Carlos Guillen

Equity markets are giving up some of the gains made yesterday, but it could have been worse. The fact that Intel's revenues slipped in the fourth quarter, along with a decline in consumer sentiment, are certainly not helping the cause, but China's better than expected economic growth is preventing a sharper drop in stocks.

The major disappointing item today was that consumer sentiment landed worse than expected. The University of Michigan Consumer Sentiment January preliminary result landed at 71.3, which was lower than the Street's expectation of 75.0 and lower than the 72.9 reached in the prior month. Perhaps sentiment could have been worse, but while the fiscal cliff dilemma has been resolved, consumers are now still facing an increase in taxes. As part of the budget agreement on January 1, Congress agreed to let the payroll tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. This 2 percentage point increase in taxes will reduce yearly income by $1,000 a year for someone who earns $50,000. As evidenced by today's sentiment data, consumers are becoming increasingly worried about their finances, and now the debt ceiling debates are continuing to support the belief that Washington is broken, which certainly does not help build confidence.

Also disappointing was that consumers' outlook for the economy declined this month, as reflected by the expectations index, which decreased to 62.7 from 63.8. This clearly puts consumer spending at risk in the short term. While discounted prices and record low interest rates have forestalled declines in buying attitudes, once consumers begin to see lower paychecks as a result of higher taxes they will surely begin tapping on the spending brakes. Moreover, consumers are now facing a reduction in their buying power not only as a result of the higher taxes but also as a result of expected rising inflation. Consumers expect an inflation rate of 3.4 percent over the next 12 months, compared with 3.2 percent in the prior survey.

Over in China, economic growth accelerated for the first time in two years helped by government efforts to revive demand drove a rebound in industrial output, retail sales, and the housing market. Chinese gross domestic product rose 7.9 percent in the fourth quarter from a year earlier. That compared with economists' 7.8 percent consensus estimate and 7.4 percent in the previous period.

While the Chinese economic growth news was encouraging, it has not been enough to lift markets significantly, and at the moment the sum of the forces are negligible with the Dow Jones Industrial Average up just five points.

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