Will the Stock Market Get a “Santa Claus Rally” or “Season’s Beatings”?

Is Santa Claus Coming To Town?

Also known as the “December Effect”, the Santa Claus rally refers to the tendency of the Stock Markets to rally during the winter holidays.  Yale Hirsch first coined the term in 1967 in the “Stock Trader’s Almanac”.  (https://www.stocktradersalmanac.com/).

 

 

The evidence, as compiled by the Wall Street Journal, however, is hardly compelling.  While December DOES deliver solid returns ON AVERAGE, so do 3 other months. December is hardly unique or special.

 

 

The MOST striking feature of the graph is for the month of September.  Unlike December, it varies dramatically from the other months.

Seasonality, as a guide to trading, is pretty weak.  If buying on December 1 and selling on December 31 produces an average return of about 1.4%, so WHAT?

In December’s first 5 trading days this year, both the Dow Jones Industrials Average (Dow) and Standard & Poor’s 500 Index (SPX) lost 4.5%.  It could have been worse.  The Dow and SPX both fell an additional 2% to their lows yesterday before rallying to close slightly higher.  Had they closed at their lows, each would be looking at a monthly loss of 6.5%.

Another Bounce Off Support But For How Long?

Yesterday’s bounce was anything but convincing.  Despite the small gain in the Dow, TWICE as many stocks declined as advanced on the New York Stock Exchange!  Stocks making 52 week lows ballooned to 355, while new highs amounted to just 10.  In order for this “bounce” to have any follow through, it will require participation from a lot more stocks and sectors.

Both the New York Composite Index and Russell 2000 Small Cap Index closed lower.   Money center banks continued their pronounced weakness.   “Collapsing Financials Lead Stock Markets Lower” (https://markonomics101.com/2018/12/08/collapsing-financials-lead-stock-markets-lower/).

It is possible the Markets will slip into a “wait and see” mode, prior to next week’s Fed meeting.   Federal Reserve interest rate policy has been fairly transparent and spurred very little uncertainty.  This upcoming meeting, however, is psychologically HUGE.

(For more information on the Fed’s interest rate policies, please see: “Is Another Financial System Crisis Ahead?” (https://markonomics101.com/2018/12/06/is-another-financial-system-crisis-dead-ahead/) and “Interests Rates in Sudden, Full Reverse.” (https://markonomics101.com/2018/12/02/interest-rates-in-sudden-full-reverse/).

Federal Reserve Meeting Next Week Looms Larger

Until quite recently, there was absolutely no doubt that the Federal Reserve would hike interest rates next week.  Now there is.  Before the meeting, which concludes on December 19th, a whole slew of economic data is set to be released.  The Consumer Price Index is set for the 12th and Retail Sales for the 14th.

Unless the upcoming data releases contain huge surprises in either direction, the Fed has a dilemma.   Not raising rates could be taken as a sign of Fed desperation in the face of a rapidly deteriorating economy.   A Federal Funds rate of 2.25-2.5% is still quite low by historical standards.

On October 2nd, Fed Chairman Powell called the economy “too good to be true”.  Thus, not raising rates could also damage the Fed’s credibility.  (https://www.washingtonpost.com/business/2018/10/02/this-is-almost-too-good-be-true-economy-fed-chair-says/?utm_term=.da8dce488bc3).

Raising rates, however, could have devastating consequences.   The yield on 10 year Treasuries (2.85%) is now only 12 basis points higher than that on 2 year Treasuries (2.73%).  Even another 0.25% hike could send shorter term rates higher than longer ones.  This phenomenon, known as an “inverted yield curve”, is often a precursor to recession.

Between the two choices, raising rates has the most personal exposure for Powell.   Unless some tangible signs of inflation present themselves within the next week, there is nothing to be gained from a rate hike.  To the contrary, the consequences of tightening too much could precipitate a recession or worse.  The Fed can always wait for more data and raise rates next time.

Signs of inflation are completely absent. “Peekaboo Inflation: Now You See It, Now You Don’t”.  (https://markonomics101.com/2018/11/05/peekaboo-inflation-now-you-see-it-now-you-dont/).

Are Transportation Companies Telegraphing a Disappointing Christmas?

Forecasts of robust year-over-year growth in holiday sales are nearly universal.  The National Retail Federation expects holiday retail sales in November and December to increase between 4.3-4.8 % over 2017.  Their forecast is higher than the 5 year average of 3.9%.  (https://nrf.com/media-center/press-releases/nrf-forecasts-holiday-sales-will-increase-between-43-and-48-percent).

A growing portion of seasonal sales are online, which continues to take market share from “brick and mortar” retailers.  A large portion of seasonal commerce is shipped via truck or plane, therefore, “higher” expected holiday sales “should” be reflected in increased shipping activity.

Companies providing Transportation of goods and people are highly indicative of economic health.  The Slide Show below shows the charts for the Dow Jones Transportation Average (TRAN), FedEx (FDX), UPS (UPS) and Ryder Systems (R).  UPS and FDX handle the majority of packages and Ryder Systems manages Trucking Fleets.

Transportations ought to be major beneficiaries of BOTH lower fuel costs AND interest rates.  Yet, they too are under pressure!  Most striking is the recent massive drop in both FDX and UPS.  Are they signaling a weaker than expected Christmas?

Dr. Copper’s Economic Diagnosis

Copper is possibly the most widely used base metal.  It has many applications in home building such as plumbing and electrical wiring.  It is referred to as “Dr. Copper” because of its PhD-like expertise in forecasting economic activity.  (https://www.investopedia.com/terms/d/doctor-copper.asp).

If Dr. Copper’s reputation is deserved, the economy is weaker than reported.  COPX is down nearly 35% from its 2018 highs.

ABN/AMRO, a Dutch Bank, performed a research study on the correlation between the price of copper and economic activity.  The study found that copper did indeed prove very useful in forecasting global economic activity.  (https://insights.abnamro.nl/en/2014/10/copper-price-economic-indicator/).

 

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