Janet Yellen Spurs Santa Claus Rally

Leave it to a nice Jewish girl from Brooklyn to give Santa Claus a nudge. In its last policy meeting of the year, Janet Yellen (who hails from Bay Ridge, Brooklyn) and her cohorts at the Fed split the difference on the language used to describe when we would see an increase short-term interest rates. The central bank “judges that it can be patient (emphasis mine) in beginning to normalize the stance of monetary policy,” but also added the new description of their stance was “consistent” with past assurances that rates would stay low for a “considerable time.” Investors loved the punt, believing that the Fed is not likely to raise rates any time soon. All of the sudden, the Santa Claus Rally was ON! In fact, after a dismal start to the week, stocks powered higher Wednesday through Friday (the best three-day percentage gain for the Dow and the S&P 500 in three years) and finished within striking distance of all-time highs. Fears melted away about the oil plunge signifying a global growth slowdown and a possible financial contagion from the Russian currency crisis, allowing ol’ Saint Nick (via Saint Janet) to take control.

Meanwhile, consumers and retailers are preparing for the last gasp of holiday shopping before Christmas. Early results have been mixed, but that might have more to do with the season stretching out over a longer period, than the fact that people are spending less overall. Separate data from IBM’s real-time tracking index of digital shopping and Adobe confirm that consumers have already spent record amounts online and companies like Wal-Mart and Target reported strong holiday numbers.

These results fly in the face of the National Retail Federation’s finding that total projected sales tumbled 11 percent during the Thanksgiving holiday weekend, but it’s important to note that NRF data is based on a totally non-scientific survey, which asks random shoppers whether they plan to spend more or less than last holiday season. Considering that most consumers can hardly recall what they spent last week - let alone last year, most analysts have dismissed NRF findings.

To determine whether or not Santa delivered retailers a jolly holiday season, we’ll have to wait until the Commerce Department releases its monthly retail sales report in January and retailers report their earnings reports for the fourth quarter. Until then, it’s probably best to concentrate on the holidays themselves and not get wrapped up in guesswork.

MARKETS: Last week was a great lesson in volatility…and if you can’t take it, then you might want to consider reviewing your portfolio allocation. For the five days, Santa stuffed investors’ stockings with gifts, not lumps of coal, as indexes climbed within spitting distance of milestones (Dow 18K) and records (S&P 500 2075).

• DJIA: 17,804, up 3% on week, up 7.4% YTD
• S&P 500: 2070, up 3.4% on week, up 12% YTD
• NASDAQ: 4765, up 2.4% on week, up 14.1% YTD
• Russell 2000: 1196, up 3.8% on week, up 2.8% YTD
• 10-Year Treasury yield: 2.18% (from 2.08% a week ago)
• January Crude Oil: $56.52, down 2.2% on week
• February Gold: $1,196, down 2.1% on week
• AAA Nat'l average price for gallon of regular Gas: $2.43 (from $3.22 a year ago)

THE WEEK AHEAD: By Tuesday at 10:15ET, you can call it quits for the week!

Mon 12/22:

8:30 Chicago Fed Nat’l Activity

10:00 Existing Home Sales

Tues 12/23:

8:30 Durable Goods Orders

8:30 Q3 GDP (final reading, previous=3.9%)

8:30 Personal Income and Spending

10:00 New Home Sales

Weds 12/24:

1:00 US Markets close early for Christmas

Thurs 12/25: CHRISTMAS DAY – MOST GLOBAL MARKETS CLOSED

Fri 12/26:

Oil Plunge and Janet’s “Considerable” Dilemma

Considerable adjective: large in size, amount, or quantity “Considerable” is the word of the week, as all eyes move from plunging oil markets to the Federal Reserve. This week, central bank officials gather for their last policy confab of the year. With bond buying now done and the economy expanding, the big question is: how might the Fed alter its policy statement to prepare investors for the inevitable increase in short-term interest rates?

Previously, the Fed has said that it would leave rates at near zero for a “considerable time,” but with the labor market improving and the economy gaining strength, there’s a case to be made to shift that language to a word of phrase that might equate to a shorter period of time. Analysts at Capital Economics have turned back the clock by a decade to see what terminology officials’ used ahead of the tightening cycle that began in 2004. “Back then the Fed went from saying that low rates would be maintained for a ‘considerable period’; to the FOMC would be ‘patient’ in removing accommodation; and then to accommodation will be removed at a ‘measured’ pace.”

Here’s how the Fed’s words translated into time:

• Considerable: 6 - 10 months
• Patient: 2 - 5 months
• Measured: one month

OK, so remember back in March when Fed Chair Janet Yellen had that woops moment at her first presser? That’s when she let it slip out that the Fed would raise rates “something on the order of around six months” after QE ended. Since QE concluded at the end of October, something on the order of six months would bring us to April 2015. Conveniently, there is a policy meeting on April 28-29, 2015 so that might be a fine time to start the process.

HOLD YOUR HORSES! The recent acceleration of the oil market sell-off may put a wrinkle on the “considerable” to “patient” exchange. While the 46 percent drop in crude oil from the June highs amounts to about $100 per month savings for US consumers, there are some analysts who believe that crashing oil is the canary in the coal mine for the global economy.

Until the last week or so, most have thought that the oil story was one part increased supply and one part tepid demand, but what if the balance is tipping in the wrong direction? In that case, falling oil has more to do with a big slow down in Chinese, European and Japanese economies than with the growth of U.S. production. In fact, that weakening growth prompted OPEC to predict that demand for its oil will hit a 12-year low next year.

If the world is really slowing down, then can the U.S. remain an outlier of growth for much longer? Investors answered that question with a “NO WAY” last week and sold stocks to underscore the point. After all, if you’re sitting atop healthy gains for the year (the S&P 500 is still up 8.3 percent YTD) and you think the globe is slowing, a reasonable response is to lighten up on your equity positions and see how things unfold. The Federal Reserve may also opt to maintain the status quo on its wording, at least until the first meeting of 2015.

MARKETS: The Grinch stole the Santa Claus rally, at least for a week! Despite seeing the worst week of 2014, the S&P 500 remains within 4 percent of its all-time high.

• DJIA: 17,280, down 3.8% on week, up 4.2% YTD (worst week since Sep 2011)
• S&P 500: 2075, down 3.5% on week, up 8.3% YTD (worst week since May 2012)
• NASDAQ: 4653, down 2.7% on week, up 11.4% YTD
• Russell 2000: 1152, down 2.5% on week, down 1% YTD
• 10-Year Treasury yield: 2.08% (from 2.31% a week ago)
• January Crude Oil: $57.81, down 12% on week (lowest close since May 2009; down 46% from June peak)
• February Gold: $1,190.40, up 2.7% on week
• AAA Nat'l average price for gallon of regular Gas: $2.56 (from $3.24 a year ago)

THE WEEK AHEAD:

Mon 12/15:

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Housing Market Index

Tues 12/16:

8:30 Housing Starts

FOMC Policy Meeting begins

Weds 12/17:

8:30 Consumer Price Index

2:00 FOMC Policy Decision/Statement

2:30 Janet Yellen Press Conference

Thurs 12/18:

8:30 Weekly Jobless Claims

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 12/19:

10:00 State Unemployment

10:00 Kansas City Fed Manufacturing

Will OPEC Decision Halt the Santa Claus Rally?

While you were enjoying your Thanksgiving meal, the 12 members of the Organization of the Petroleum Exporting Countries (OPEC) announced that the cartel would hold its output target at 30 million barrels per day. The decision caused a steep sell off in Brent crude oil (the global benchmark) on the ICE Futures Europe. When U.S. markets opened on Friday, investors dumped West Texas Intermediate crude on the New York Mercantile Exchange and futures plunged 10.2 percent to $66.15 a barrel, the lowest settlement since September 2009. Both oil benchmarks are experiencing their worst losing streaks since the financial crisis in 2008, with 18 percent losses for the month of November. As previously mentioned in this space (Peak Oil Pukes), sinking oil and gas prices should help consumers, but the savings has not yet created overall cheer. Last week, the Conference Board said that its consumer confidence index dropped to a four month low in November. But Capital Economics notes “this fall needs to be taken into context alongside the sharp rise earlier in the year.” In fact, confidence is still close to seven-year highs.

What has been driving confidence this year has been the steady improvement in the jobs situation. Through October, the economy has added 2.225 million private sector jobs and 2.285 million total jobs in 2014. The November jobs report, which is due this Friday, is expected to show that the economy added 220,000 jobs. If that happens, 2014 will be the best year for private employment since 1999, according to Calculated Risk.

The unemployment rate is expected to remain at 5.8 percent, which puts it close to the Federal Reserve’s estimate of the longer-term, normal rate of unemployment of 5.2 percent to 5.5 percent. But with wages still up only 2 percent year over year, the central bank is likely to keep interest rates at 0 to 0.25 percent until next year.

Despite lots of energy and attention, the initial reports from retailers about the big holiday weekend may tell us less about the economy than the jobs report. Analysis from the New York Times found that while the holiday season is important for retailers, it “matters only a little bit” for the overall economy. The reason is clear: consumers would spend a certain amount of money in any two months. When stripping out the normal expenditures, “for the last two months of the year, Americans are on track to spend $106 billion more than they would if these were any old months.” Not that you would sneeze at $106 billion, but compared to the $17.6 trillion US economy, it’s not nearly as important as the elusive 3 percent increase in wages that we have seen in previous expansions.

MARKETS: Will investors be treated to a “Santa Claus Rally”? The old Wall Street chestnut predicts stocks do well during the period just after Thanksgiving through the end of the year. Over the past five years, the S&P 500 has gained an average of 2.5 percent during December. But OPEC's decision to maintain current production levels could weigh on energy stock prices, curtail energy company profits and limit the near-term upside in markets.

• DJIA: 17,828, up 0.1% on week, up 2.5% on month, up 7.6% YTD
• S&P 500: 2067, up 0.2% on week, up 2.5% on month, up 11.9% YTD
• NASDAQ: 4791, up 1.7% on week, up 3.5% on month, up 14.7% YTD
• Russell 2000: 1173, up 0.01% on week, up 2% on month, up 0.8% YTD
• 10-Year Treasury yield: 2.17% (from 2.31% a week ago)
• January Crude Oil: $66.15, down 13.5% on the week, down 18% on month
• December Gold: $1175.50, down 1.8% on the week
• AAA Nat'l average price for gallon of regular Gas: $2.78 (from $3.28 a year ago)

 THE WEEK AHEAD:

Mon 12/1:

Cyber Monday

9:45 PMI Manufacturing

10:00 ISM Manufacturing

Tues 12/2:

Motor Vehicle Sales (2014 is on pace to be the best year since 2006)

10:00 Construction Spending

Weds 12/3:

8:15 ADP Private Sector Employment Report

8:30 Productivity

10:00 ISM Non Manufacturing

2:00 Fed Beige Book

Thurs 12/4:

8:30 Weekly Jobless Claims

Fri 12/5:

8:30 November Employment Report

10:00 Factory Orders

3:00 Consumer Credit