Equity markets staged a robust relief rally in last week’s holiday shortened sessions but still left December likely on track for the worst month since February 2009. Fortunately, the erratic market behavior last week scaled more to the upside including the first ever DJIA 1,000 point up day (Wed) and the largest intraday recovery (Thurs) in history despite the worst Christmas Eve (Mon) selloff on record. Despite very little developing news outside of the Fed, China, and government shutdown narratives, volatility remained elevated. An exceptionally light economic calendar gave fixed income, currency, and commodity markets very little guidance as yields, commodities, and the U.S. dollar all moved lower.
- Ironically, the S&P 500 is now up 3% since the government shutdown occurred.
- U.S. equity markets are poised for 4%-7% losses in 2018. The NASDAQ, now officially in a bear market, has fallen most swiftly since September but was sitting on larger gains in the first half. Biggest winner so far is the healthcare sector (+3.4%) while the energy sector is -20.5%.
- Last week’s rally put the DJIA and S&P 500 14% and 15% respectively off their September highs.
- The drop in the USD and short end of the yield curve are both market indications of forward expectations for few, if any, rate hikes next year.
- Favorable jobless claims and current sentiment indicators lead to constructive expectations for the holiday shopping season.
- The S&P 500 remains in a clear downtrend but the oversold nature is clear. Only 11% of stocks are above their 50-day moving average and the A/D line remains very oversold.
- In another capitulation marker and for the first time since 2013 an AAII survey revealed the majority of retail investors see the stock market declining over the next six months.
Economic Release Highlights
- October’s Case-Shiller HPI showed some traction, rising an as-expected 0.4% for the month. The annual rate decreased 0.2% to 5% growth, the lowest rate in 2 years.
- December’s Conference Board Consumer Confidence survey fell sharply to 128.1, missing consensus estimate calls for 134. The weakness was pronounced in the expectations’ components more so than current conditions.
- Fed balance sheet totaled $4.076t. To date, Treasury holdings are down $224.8b, less than the target of $270bb and MBS has declined $131b, less than the target of $180b.
- Chicago PMI sustained a robust level of 65.4, well in excess of 62.4 consensus estimates. Both production levels and backlog orders were strong while new orders and employment eased slightly.
- November Pending Home Sales fell 0.4%, indicating further weakening in the housing markets. Pending sales YoY are down 7.7%. This is in contrast to existing home sales data which has been leveling off.