Santa Claus Rally Fails To Materialize

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery. – Charles Dickens, David Copperfield

Let me begin by wishing a Happy New Year to all. The departing year 2016, one of the most polarizing years in the recent memory of the West, was also marked by a surprising number of premature celebrity deaths. In its waning days we saw the sad addition of Star Wars icon Carrie Fisher only last week, and the almost sadder follow-up of her mother dying the very next day. What a year.

Thanks to the Trump stock-market rally that lifted the markets out of a two-plus year run of going virtually nowhere, equity markets ended the year with high single digit gains even as bond markets took a beating. The so-called Santa Claus rally that is supposed to begin the day after Christmas has so far failed to materialize, not a huge surprise given a first half of December that had run well ahead of historical performance. Strictly speaking, there are still two days left in Santa’s window, with an historical upward bias to the first two trading days of the year.

The post-election rally was based virtually entirely on sentiment, leaving valuations entering 2017 at very high levels. The usual sentiment that it will all be made right in the end prevails on the Street, despite the dismal record of the last two similar rallies (Bush 2000, Reagan 1980). With 2016 now behind us, only time will tell if the rally was just another trade or not.

The two main things to look for in the first week of the year are one, the performance of the first two trading days, and two, the jobs report on Friday. As noted above, there is an upward bias to the first two days, but this year could be affected by pent-up selling (the election rally may have been aided by domestic managers holding onto gains in order to take advantage of a presumably more tax-friendly regime in 2017), There is also the related matter of the Fed minutes on Wednesday, which is the second trading day of the year and the last of the Santa period. While the Street is perfectly capable of deciding that even the worst news is really good, further evidence that the governors are hell-bent on raising rates might further encourage profit-taking.

It’s a mug’s game to guess the employment report so I won’t, but the weekly claims data did suggest that December jobs growth might come in below consensus. There were one or two other clues pointing in the same direction, but nothing definitive and the first estimate is still just an estimate. Something to watch.

A Happy and prosperous New Year to all.

The Economic Beat (in holiday time)

Did the surge in the ten-year bond yield pull forward some housing sales? Pending home sales (existing homes only) showed a surprising decline in December of 2.5% after good November sales. It’s only one month, but stay tuned. The Case-Shiller price index was steady at +5.1% year-on-year.

Regional business surveys keep showing optimistic readings ahead of actual activity: Richmond rose from 4 to 8, Dallas from 10.2 to 15.5 (0 = neutral for both), though Chicago’s purchasing manager index came in somewhat, to 54.6 from 57.6 (50 = neutral). Preliminary wholesale inventory data suggested an unwanted build in November, possibly from weak sales. Consumer confidence is at a 15-year high, with the reading fueled by future expectations.

The trade goods deficit in November was larger than expected in the initial estimate, pressuring fourth quarter GDP estimates.

Next week gets off to a delayed start with all markets closed on Monday. Tuesday brings the latest national survey of manufacturer purchasing managers (ISM), along with the first estimate of November construction spending.

Wednesday has the ADP private payroll survey and the release of the latest Fed meeting minutes, Friday has the complete international trade estimate, November factory orders and of course the big enchilada, December payrolls. Consensus for jobs is for growth of about 175K, and while there are some indications the number might be light, the monthly data are too elusive for me to try to guess. Happy New Year!