The Crazy Christmas Week

Last week was an object lesson in why it's usually not wise to pay too much attention to the market's daily moves. Let's recap:

• Monday: In abbreviated Christmas Eve trading, the S&P 500 fell 2.7 percent, and the Dow dropped 600 points, its worst Christmas Eve ever.
• Tuesday: The markets are closed for Christmas.
• Wednesday: The biggest one-day percentage rise for all three indexes since March 2009; the Dow rises by 1000 points, its biggest point gain ever. 
• Thursday: The markets are down nearly 2 percent by 2 p.m., then reverse course to finish up by more than 2 percent.
• Friday: The markets waver all day before finishing up slightly. For all the drama, the S&P ends the week up 2.9 percent, and the Dow is up 2.8 percent.

Confidence Takes a Hit

The latest consumer confidence survey shows that Americans' optimism about the economy fell for the second month in a row in December. Confidence is now at its lowest point since July, putting the index almost 10 points below the 18-year peak it had set in October.

The percentage of consumers saying business conditions are “good” decreased from 42.0 percent to 37.2 percent, while those claiming business conditions are “bad” increased from 10.7 percent to 11.3 percent. Those claiming jobs are “plentiful” slipped from 46.8 percent to 46.2 percent.

The bigger worry is about 2019. The future expectations index — what Americans think the economy will look like six months from now — sank to 99.1 from 112.3. That’s the lowest reading for this figure since October 2016.

Christmas Sales Were Very Strong

It was a merry Christmas: Shoppers delivered the strongest holiday sales increase for U.S. retailers in six years, according to the data now starting to come in. Overall, U.S. consumers spent over $850 billion this holiday season.

Total U.S. retail sales, excluding automobiles, rose 5.1 percent between November 1 and December 24 from a year earlier, according to Mastercard SpendingPulse. Unlike a lot of these measures, MasterCard tracks both online and in-store spending with all forms of payment.

Sales have been generally strong throughout the holiday season, led by increases in online shopping. Retailers entered the holidays with momentum as online sales jumped 26.4 percent from a year earlier between the Wednesday before Thanksgiving through Black Friday.

Rebounding from a Disaster Quarter

It hasn’t been a great quarter for the stock market. There have been more than 370 quarterly returns since 1926, and if the quarter were to end today, this would be the 14th worst for the S&P 500 index in that time frame.

This doesn't have to be a terrible omen for the future. Among those 13 previous quarters:

• After the S&P dropped 37 percent in the second quarter of 1932, it rose 345 percent over the next five years
• After the S&P dropped 22 percent in the fourth quarter of 2008, it rose 128 percent over the next five years 
• After the S&P dropped 18 percent in the third quarter of 1946, it rose 115 percent over the next five years

The average outlook for the next five years after those 13 disaster quarters: a rise of 91.3 percent. So maybe we'll be all right.

Thoughts for Christmas Day

"Christmas Eve was a night of song that wrapped itself about you like a shawl. But it warmed more than your body. It warmed your heart...filled it, too, with melody that would last forever." ~ Bess Streeter Aldrich

"There's nothing sadder in this world than to awake Christmas morning and not be a child." ~ Erma Bombeck

"Unless we make Christmas an occasion to share our blessings, all the snow in Alaska won't make it 'white.'" ~ Bing Crosby

Here Comes Santa Claus?

As we enter the week of Christmas, many investors are hoping to see a Santa Claus Rally in the next couple of weeks. A Santa Claus rally describes sustained increases in the stock market that occur in the last week of December through the first two trading days in January.

Since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons. The average cumulative return over these days is 1.4 percent, and returns are positive in each of the seven days of the rally, on average.

There isn't a solid theory to explain the Santa Claus rally. Maybe the most plausible attributes it to investors buying before January to take advantage of price increases due to the January effect. This refers to increases in stock prices after a drop in prices in December, triggered by fund managers selling for tax loss harvesting purposes.

Oil in Freefall

While the stock market continues to suffer, oil prices continued to fall even more steeply. The U.S. benchmark, West Texas Intermediate, is down almost 40 percent since a high in October. Brent crude, the international benchmark, fell yesterday to its lowest levels in 15 months.

The sharp decline in oil prices has been largely attributed to an oversupply shock of oil, caused by U.S. shale production and production cuts by OPEC nations. The Fed's rate hike this week may also have spurred further downward price pressure.

But also creeping into the picture: The demand side of the crude equation is starting to slow around the globe. Oil consumption in China, India and other economies across emerging Asia—the source of two thirds of global oil demand growth—is slowing. Some analysts say oil demand next year could grow at its slowest pace in eight years.

The Fed Rate Hike

As expected, the Federal Reserve took the target range for its benchmark Fed Funds rate to 2.25 percent to 2.5 percent yesterday. The move marked the fourth increase this year and the ninth since it began raising rates in December 2015.

The Fed also lowered its outlook for the long-term rate, from 3 percent in the September forecast to 2.8 percent this month. The 2019 estimate declined to 2.9 percent from 3.1 percent, and both 2020 and 2021 dropped to 3.1 percent from 3.4 percent.

Changes to the long-term growth rate were mixed. The Fed now sees GDP as growing 3 percent for the full year of 2018, down one-tenth of a percentage point from September, and 2.3 percent for 2019, a 0.2 percent point reduction.

Fund Managers Brace for the Worst

Professional money managers have turned bearish in their outlook for the stock market and the economy, according to Bank of America Merrill Lynch’s new December survey of more than 240 professional investors.  More than half, 53 percent, of those surveyed see the global economy deteriorating over the next twelve months, up from 44 percent in November.

That's the highest share of those surveyed since October 2008. Despite the expectations for slowing global economic growth, most do not think there will be a recession in 2019. Only 9 percent of those surveyed expect an actually recession next year.

One result of this attitude: Fund managers are fleeing stocks and buying bonds in record numbers. This month's survey found the biggest ever one-month move into the asset class of bonds.

The Great Cheese Glut

Tough times for an odd corner of the economy: About 1.4 billion pounds worth of American, cheddar and other kinds of cheese is now socked away at cold-storage warehouses across the country, the biggest stockpile since federal record-keeping began a century ago.  Cheese exports have suffered since Mexico and China, major dairy buyers, instituted retaliatory tariffs on U.S. cheese and whey.

Cheese shipments to Mexico in September were down more than 10 percent, according to the U.S. Dairy Export Council trade group. Shipments to China were down 63 percent on an annual basis.

Does that mean good news for cheese lovers in America? Spot market prices for 40-pound blocks of cheddar fell around 25 percent this year from 2014 prices, while 500-pound barrels, typically used for processed cheese, fell 28 percent.

The Split Between the Market and the Economy

The American economy keeps humming along. Data released on Friday showed retail sales excluding autos and gasoline grew by 0.9 percent in November, on top of a revised 0.7 percent increase in October. That prompted the Atlanta Fed to raise its fourth-quarter GDP prediction to 3 percent from 2.4 percent.

On the other hand, the stock market isn't doing so well. After another dismal day on Wall Street on Friday, the &P 500 Index is now down by 10 percent for the fourth quarter.

The divergence between the economy and the market is getting to be historic. If the Fed predictor proves accurate and there is no Santa Claus rally on Wall Street, it’d be the first time since 2010 that the economy grew by 3 percent and the S&P 500 fell at least 10 percent in the same quarter.

Inflation Quiets Down

There have been rumblings of higher inflation recently, but here’s an indicator moving in the opposite direction. U.S. import prices fell by the most in more than three years in November, the Labor Department said yesterday. The cost of petroleum products tumbled, and a strong dollar weighed on prices of other goods,

All this points to subdued imported inflation in the near term. Overall, import prices dropped 1.6 percent last month, the biggest decline since August 2015, after a 0.5 percent increase in October. For the 12 months through November, import prices rose just 0.7 percent. That was the smallest annual increase in two years.

In related news, the Federal Reserve’s preferred inflation measure, the core PCE price index excluding food and energy, increased 1.8 percent on a year-on-year basis in October, after rising 1.9 percent in the prior month. That was its smallest gain since February.

Small Businesses Slip a Step

A rare troubling sign for the economy: The NFIB Small Business Optimism Index fell in October. Just 29 percent of business owners surveyed said the next three months was a good time to expand, one point lower than last month’s reading.

The November decline was the third month in a row that the index had fallen. The seasonally adjusted reading of 104.8 is the lowest for this figure in seven months.

For October, reported job creation was unchanged, as 60 percent of businesses reported hiring or trying to hire, but 53 percent reported few or no qualified applicants for the positions they were trying to fill. Twenty-five percent of employers surveyed cited the difficulty of finding qualified workers as their top business problem.

Factories at Full Blast

Job openings have surged at U.S. manufacturers of durable goods from machinery to cars in recent months. New data out from the Labor Department suggests that, in particular, job openings for factories have reached an all-time high.

The job openings rate for the durable-goods manufacturing industry reached 4 percent in October, a record since they started keeping this data back in 2000. That’s up from 3.7 percent in September and 3.1 percent a year earlier. Total factory openings were 332,000, compared with about 8 million jobs in the sector.

Overall, the number of job openings in the U.S. rose slightly in October to just over 7 million, which is very close to a record high. Job openings had hit an all-time record of 7.3 million in August.

The Market's Roller Coaster

Yesterday was an object lesson in why it's never too wise to follow every single up and down of the market. Shortly after the opening bell, the Dow Jones Industrial Average plummeted more than 500 points, after British Prime Minister Theresa May announced that the Parliamentary vote on Brexit was being delayed, admitting that it would fail if the vote were held on schedule.

That started what looked like a rout. At their lowest points, the S&P had shed 50 points and the Nasdaq was down 81 points. But in the end, the Dow rose 34 points, the S&P gained 4 points, and the Nasdaq rose 51 points.

There was a similar story in tech. Shares of Apple initially fell after a Chinese court granted Qualcomm an injunction against the iPhone maker, but by the end of the day, the stock erased a more than 2 percent pullback to close 0.65 percent higher. Facebook shares rose 3.2 percent while Amazon, Netflix and Alphabet all rose more than 0.6 percent.

The Outlook From Big Business

Business CEOs are forecasting 2.7 percent U.S. GDP growth in 2019, according to the estimate released Friday by the Business Roundtable as part of its fourth-quarter economic outlook. While 80 percent of the CEOs surveyed expect sales will increase over the next six months, just a little over half (53 percent) expect capital spending and hiring (56 percent) will rise.

When asked about the greatest price pressures their companies face, 13 percent of the CEOs surveyed identified regulatory costs versus 40 percent two years ago. Far more identified labor costs (37 percent) and materials costs (20 percent) as the leading cost pressures for companies.

Not surprisingly, roughly 90 percent of the CEOs surveyed said that maintaining the 21 percent corporate tax rate, enacted in the 2017 tax cut bill, and easing regulations further will benefit business activity.

November's Jobs Report

The employment situation slowed a bit in November, according to numbers out this morning from the Bureau of Labor Statistics. The economy added 155,000 new jobs for the month, compared with an average monthly gain of 209,000 over the prior 12 months. Nevertheless, the headline unemployment rate remained at 3.7 percent for the third month in a row, the lowest it has been in 49 years.

Still, the economy is on track to produce the most new jobs since 2015. The U.S. has added an average of 206,000 jobs a month through the first 11 months of 2018, above the 182,000 pace during the same period last year.

For November, the increase in jobs was concentrated in health care, manufacturing and transportation. Health care providers hired 32,000 people, manufacturers added 27,000 workers and employment in transportation climbed by 25,000. Retail stores took on more workers for the first time in three months, adding 18,000 jobs. Employment fell slightly in government and in an energy industry reeling from lower oil prices.

What Women Lack

Here's an unfortunate gender gap: Women invest 40 percent less money than men do, according to a Wealthsimple survey. The investment app Acorns found that 57 percent of women didn’t invest anything in 2017, compared to just 44 percent of men.

It's not that they don't have any money. Women on average have about $156,000 in investable assets, compared to more than $200,000 for men. And women are less likely to feel in control of their financial futures than men (65 percent to 70 percent) and are less likely to feel like they know what steps to take next (60 percent versus 68 percent.)

The result: U.S. financial services firms that still focus their attention on wooing men lose almost $800 billion in investable assets from women. All these figures come from Kantar’s “Winning Over Women” report, released on Tuesday.

The Trouble With Transports

The Dow Jones Transportation Average, often considered a bellwether ahead of the larger Dow Jones Industrial Average, suffered through its biggest-ever point drop yesterday. The Dow transports tumbled 476.37 points, or 4.4 percent, with all 20 of its components closing lower. The previous biggest-ever point decline had happened on October 10.

Many on Wall Street view the Dow Transports as a key economic indicator. That sub-index helps gauge how consumers and businesses are actually taking what companies are making.

Within the Dow Transports, the biggest drag yesterday was UPS, which sank 7.4 percent, its biggest decline since January 2015. FedEx fell by 6.3 percent, suffering its steepest decline since March 2013.

Santa Rally on Tap?

Stocks kicked off the first trading day of December with gusto, with the S&P 500, Nasdaq and Dow Jones industrial average all up by more than 1 percent. That sparked hopes for a so-called Santa rally: the traditional runup in the stock market from the last week of December through the first two trading days in January.

Since 1950, no other month has recorded a higher average return or has finished higher as often as December. Over the last 100 years, the Dow has averaged a gain of 1.55 percent in December, with gains 74 percent of the time.

It's even better the last two weeks of the year. For the S&P, the days during the Santa rally have gained 1.35 percent on average, with only one other seven-day period of the entire year sporting a better return. The seven days of Santa have been higher 77.6 percent of the time, making it the seven days of the year that are most likely to be higher

Remembering Bush

All the major financial markets will be dark on Wednesday to honor the memory of former President George H.W. Bush, who passed away late Friday at the age of 94. The New York Stock Exchange and the Nasdaq will both be closed for the day.

The day of a president's funeral has traditionally been a national day of mourning. Financial markets were closed, for example, Friday, June 11, 2004, after President Reagan died. After President Ford died on December 26, 2006, the markets were closed on January 2 of the following year, even though that meant they'd be dark for four straight days, including the New Year's holiday.

The NYSE has traditionally observed the death of former and sitting presidents by closing for an entire day, starting at the onset of the 20th century. Former President William McKinley's funeral was the first to be so honored on September 19, 1901.