Last week's holiday-shortened trading resulted in one of the quietest weeks of the year. The S&P 500 waded through low volume and low volatility to sit just 1.91 percent below May's record high.
Still, the picture remains murky. Through Friday's close, just 11 of the S&P 500's 24 industry groups were up on the year. The weakest annual reading since 2008 when all 24 groups were down.
This week finds us focusing on two near-term issues. The holiday retail season. And the prospects for a December rate hike.
Regarding Christmas shopping, the early data and underlying fundamentals portend a positive result.
First, nonfarm payrolls rose 2.8M the past 12 months. The strongest one-year increase leading into Christmas since '99.
Second, signs of wage growth have begun to dot the labor landscape. Average hourly earnings have risen 2.5 percent the past year. The fastest rate since the credit crisis ended.
Finally, consumer financial obligations and debt service as a percentage of income sits at its lowest level since the early '80s. Meaning consumers have less money going out as a percentage of what's coming in.
Consumers will have more discretionary income and -- thanks to eTailors -- will rely less on time-consuming, soul-tearing trips through Dante's Nine Circles of Shopping Mall Hell. And though Thanksgiving and Black Friday sales were down, a Shoppertrak survey shows that purchasing trends have pushed earlier into November and later into December as online shopping becomes more prominent.
So, how about that year-end rate hike?
Well, the Fed's decision will heavily depend upon this Friday's all-important labor data. As well as Janet Yellen's Thursday comments to Congress. With many pundits touting that the Fed's December rate-hike decision will be determined by Friday night.
While these two narratives are no more intriguing than a Justin Bieber lyric, they will help to determine the market's near-term direction. And so they must be considered.
Based on rising rate expectations, markets could get a little dicey towards week's end. Though we don't anticipate a huge jump in volatility. And some stocks will benefit. Like financials. And regional banks. Still, could help to have a little cash heading into next week.
Speaking of cash.
Clients sometimes ask of the cash held in their accounts over periods of time. Primarily because Wall Street's sales force, via the big four brokerages, have convinced Main Street that investment capital contributions must immediately be put to work. An unfortunate, often harmful fallacy.
Fact is, many of history's great investors have made a habit of holding cash. Agnostic as to the amount of time held. Because, as we know, markets will on occasion behave irrationally. And when they do, opportunities oft reveal themselves like nuggets in a creek bed.
Blindly putting money to work just for sake of being fully invested? A fool's errand. As no investment, asset class or idea rises in perpetuity. Making cost basis a big deal. And if the occasional Ebola scare, geopolitical dust-up or political scandal sends markets lower, investors will be well heeled to have capital available. Some dry powder for when the shooting begins.
In Saudi Arabia, OPEC's de facto kingpin has begun to reverse its year-long demeanor. Now saying that oil's low pricing threatens to hurt new-project investment. And that a $60-80 dollar per barrel price would provide a "Goldilocks scenario" by guaranteeing investment capital without providing too much impetus for the funding of alternative energy sources.
While it's true that OPEC's "lower-for-longer" pricing policy has hurt many American shale oil producers, so too has it adversely impacted numerous OPEC nations. Including the Saudis. Putting pressure on the domestic finances of producer nations which have budgets based on markedly higher oil prices.
Globally, lower oil has been good for consumers. But the stock market has correlated to lower prices. And of course, energy-sector earnings have suffered. Keeping stocks in check while contributing to the bear market already playing out in the commodities sector. This merits our attention as the story line plays out.
Aligning with the holiday spirit, tis' that wage inflation beneath the tree?
Sure hope so. Yardeni Research revealed that wage inflation is starting to materialize out of a tightening labor market. A data point for which economists had long awaited. Total private industry earnings have risen to post-recession highs. Following a long, lateral trend line dating back to 2012.
Continuing low interest rates? Falling gas prices? Rising take-home wages? Could be just the cocktail needed for a seasonal retail surprise and another catalyst for the economy. If not even for the elusive Santa Clause Rally. Veteran market observers know that December has been a great month historically for stocks. Do remember, however, that the gains tend to be back-end loaded.
These last 20 years have seen the S&P 500 decline during December's first half by an average of 0.3 percent. Followed by a gain of 1.7 percent in the year's final two weeks.
Going back to 1928, the index has averaged a goose egg over December's initial half. Followed by a 1.4 percent gain in the latter half. Of course, nothing is guaranteed. But as historical data illustrates, Jolly Ol' Saint Nick has been loath to disappoint. So stay tuned...
The Good
OPEC may be preparing to steer oil prices higher... Personal income grew 5.3% YOY, the best gain since May... Q3 GDP was revised slightly higher... Hedge fund shorts (bets against) oil peaked for the year - a contrarian bullish indicator as HF returns have lagged... Fewer homeowners are "underwater" than they believed (8.7% vs. 27% believing they are)... Durable goods orders beat expectations...
The Bad
Rail traffic is still declining... Existing home sales declined... New home sales disappointed... Personal spending lagged expectations... Corporate profits have turned negative (though energy plays a big role and that could change)... Consumer confidence was disappointing...
Ugly
Former CIA Deputy Director Michael Morell recently spoke with Charlie Rose. Admitting that the U.S. administration failed to destroy ISIS's ability to generate revenue via stolen Iraqi and Syrian oil fields for two reasons. First, the potential environmental damage. Second, the potential infrastructure damage. Which, should the proclamation be valid, strikes us as one of the most narrow minded approaches to problem solving in the history of western geopolitics.
Twain and the P.C. Gestapo
According to Carl Cannon of RCP, it was one hundred and 10 years ago this week, Mark Twain - the Sage of Mississippi - acknowledged the detriments of smoking. Though he wrote to a friend that while he had heard these cautions, he hadn't heeded them.
In fact, that letter to a friend acknowledged the dangers of Twain's beloved cigars while inveighing against the attempts of others to have him quit smoking.
"When they used to tell me I would shorten my life ten years by smoking," he wrote, "they little knew the devotee they were wasting their puerile words upon -- they little knew how trivial & valueless I would regard a decade that had no smoking in it!"
Twain gained fame and fortune for his acerbic, non-politically correct wit. Making any number of comments that would rouse the ire of today's P.C. henchmen.
"In the first place, God made idiots. That was for practice. Then He made school boards."
"The jury system puts a ban upon intelligence and honesty, and a premium upon ignorance, stupidity, and perjury."
"I would throw out the old maxim, 'My country, right or wrong,' and instead I would say, 'My country when she is right.'"
Additionally, Twain was not afraid to charge into the fray when bullies, brutes and autocrats were indulging their baser instincts. He ostensibly would have viewed the politically correct cabal of the American university, cultural and political landscapes as goose stepping verbal fascists. Seeking to silence one of the nation's true innovations: free speech.
Hopefully, university and cultural thought leaders soon arrive at a Twainian level of conviction in these matters. As the university remains among the last bright spots within the American educational universe. Let's hope that intellectual high handedness, creative lethargy and political correctness do not undermine the last of the nation's educational crown jewels.
Weekly Results
Major markets finished mixed last week. The DJIA fell 0.14%, the S&P 500 rose 0.04%, and the Nasdaq added 0.44%. Small cap stocks gained 2.32%. And the 10-year Treasury bond yield fell 4 basis points to 2.22%. Gold lost $19.90 per ounce, or -1.85%.