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.