Wentz Weekly Insights
The “Santa Claus Rally”
The Santa Claus Rally could see a big test this year as markets continue to deal with the concerns of high inflation, a slowing economy, recession risks, and earnings uncertainty. As is noted a lot heading into the last week of the year, stocks historically have a positive end to the year.
We note every year around this time of the year markets tend to have a positive performance that is referred to as the Santa Claus Rally. The Stock Trader’s Almanac says the Santa Claus Rally is a calendar effect that involves a rise in stock prices during the last five trading days of the year and first two trading days of the new year. During this period, the S&P 500 is positive 79% of the time and has an average gain of 1.4% over that period, going back to 1950, according to Dow Jones Market Data, much better than the average of any given 7-day period of 0.21%.
There are numerous theories that explain the reason for the rally including tax purposes, buying due to optimism after the holidays and from heading into a new year, and investing of holiday bonuses. However, as Ed Yardeni from Yardeni Research notes “the bulls can’t win… if the economic indicators are too strong, the Fed will have no choice but to tighten until a recession occurs. If they are weak, then a recession might be coming sooner.”
That is what happen last week, particularly on Friday. The personal income and outlays data from the Bureau of Economic Analysis showed personal income slowed to a 0.4% increase in November, but wages and salaries grew another 0.5%, or 6.0% annualized, far too high for the Fed as it could lead to additional inflationary pressures, while consumer spending rose just 0.1%, a large slowdown from the 0.8% increase in October, leading to concerns about a slowdown in consumer spending and causing stocks to move lower right away.
While calendar effects, low volume, and a lack of any significant catalyst could lead to a positive performance over the next seven days, there are still elevated risks to the equity markets that could lead to additional downside in the upcoming weeks and months.
We hope everyone has a wonderful holiday and wish everyone a healthy and Happy New Year!
Week in Review:
Stocks opened the week in the red again, starting the week how it finished the week prior. The S&P 500 found some resistance around the 3,800 level and bounced going into the close to end just off the lows of the day. It was a light day of headlines with markets still focused on the Fed, and global central banks, and its hawkish message. Treasury yields rose across the curve with the 10-year yield back up to 3.60%.
Tuesday morning was met with a surprise announcement from the Bank of Japan that it would widen its yield curve tolerance range to +/- 50 basis points and allow its 10-year government bond yield to rise to as much as 0.50%, while keeping short-term interest rates unchanged. This sent Japanese bond yields higher, its currency, the yen, higher against global currencies, and its stocks down. In was a quieter day in US markets with stocks trading in a tighter range and the S&P 500 finishing up 0.28% while bond yields rose on the BoJ news.
Much better than expected earnings from Nike and mixed results from FedEx, with cost cutting initiatives, had stocks starting on a positive note to Wednesday’s session. In addition, the consumer confidence survey for December suggested consumers felt much better about the economy and the future, but this may be due to a drop in gas prices – we need to see more data to support a more optimistic view. All sectors finished positive on Wednesday with the S&P 500 1.49% higher and Treasury yields relatively unchanged on the day while oil creeped 3% higher.
Stocks did not follow through with gains on Thursday following disappointing earnings results and outlook from memory chip maker Micron that rattled the markets, along with strong economic data that included an upward revision to third quarter economic growth, as well as the GDP price index, and low unemployment claims. Treasury yields were relatively unchanged again while stocks fell 1.45%.
Stocks were positive premarket on Friday morning until the personal consumption expenditure price index, the Fed’s more preferred measure of inflation, suggested slightly higher inflation than expected in November, while wages and salaries increased another 0.5% in the month (now up 7.1% from a year ago), leading to a decline in stocks at the open. Outside of the data in the morning it was a quiet day before the extended holiday weekend. Stocks were able to recover and finish 0.59% higher for the day.
While stocks traded back and forth all week, oil prices rose 7.1% on no real news beside China easing Covid policies, while bond yields rose as the markets continue to digest the Fed’s message of higher interest rates for longer. The major U.S. stock indices finished the week as follows: Dow +0.86%, Russell 2000 -0.14%, S&P 500 -0.20%, and NASDAQ -1.94%.
Recent Economic Data
- Home builder sentiment was down another 2 points in December, with the index down to 31 for 12th consecutive month of declines (anything below 60 reflects weaker conditions) and for the lowest reading since 2012. Positive news is sales expectations over the next 6 months improved slightly. Also, 62% of builders are noted to be incentivizing new purchases, for example with mortgage buydowns (buying points to reduce interest rate).
- The number of housing starts fell 0.5% in November to a seasonally adjusted annualized rate of 1.427 million homes. This is 16.4% below the November 2021 rate of 1.706 million. The number of permits filed in the month to build a new home fell 11.2% to an annualized rate of 1.342 million and is 22.4% below the rate from a year ago.
- The number of existing home sales in November was 4.09 million, on a seasonally adjusted annualized rate, falling 7.7% in the month for the 10th consecutive months. Sales of existing homes are now down 35.4% from a year ago. Housing supply has been up and down, with 6.6% less homes on the market in November at 1.14 million units, but up 2.7% from a year earlier. The unsold inventory sits at 3.3 month supply at the current sales pace, improving from 2.1 months a year ago. Median prices continue to climb, up to $370,700 in the month, a 3.5% increase from last year. Properties are starting to be on the market longer, with the average listing up to 24 days, up from 18 days a year ago, with 61% of homes on the market less than one month.
- Sales of newly built single-family homes rose 5.8% in November to a seasonally adjusted annualized pace of 640,000 homes, much better than the 600,000 expected. This represents a 15.3% decline from the pace a year ago. The median sales price has been pretty volatile this year, just like actual sales, and declined 2.8% to $471,200, but is still up 9.5% from a year ago. New home sales tends to show more volatile results from month to month, but the overall trend is much lower sales than where the year started, although plateauing recently.
- The consumer confidence index, derived from a survey of consumers by the Conference Board, was at 108.3 for the December survey, better than 101 expected and represents a solid increase of about 7 points from November for the best level since April. The present situations index was 147.2, more than expected and 9 points above November, while the expectations index was 82.4, up from 76.7 in November. A level below 80 represents recession worries, however the 82.4 in December was the best level of the year. Confidence may have bounced back thanks to lower gasoline prices and the recent rise in asset prices like stocks.
- The number of unemployment claims filed last week was 216,000, relatively unchanged from the prior week, with the four-week average at 221,750. The number of continuing claims was 1.672 million, down slightly from the prior week with the four-week average up about 30k to 1.657 million.
- Third quarter GDP was revised up in the final estimate to a 3.2% annualized increase in the quarter, above the second estimate of 2.9%. The higher growth was due to upward revisions in consumer spending, nonresidential fixed investment (business investment), and government spending, offset by downward revisions in inventory investment and exports. In addition, the GDP price index was revised up again, to a 4.8% increase, up from 4.6% in the first estimate.
- The BEA’s personal income and outlays report showed another large increase in incomes, consumer spending that slowed, and inflationary pressures that continued in November:
- Personal income rose 0.4% in November, slightly more than expected but decelerating from a 0.7% increase in October. Compared to a year ago income is up 6.2%. The more important item, and something the Fed will focus more on, is wages and salaries which grew another 0.5% in the month and are now 7.1% higher from a year ago.
- Consumer spending via the personal consumption expenditure index rose 0.1% in the month, a sharp slowdown from the average 0.8% monthly increase seen over the past 24 months. Compared to a year ago spending was 9.0% higher. The shift to service spending continues, which rose 0.7% in the month while spending on goods fell 1.0%. Goods spending has slowed to a 5.1% increase from a year ago while services spending has grown to a 10.4% increase. The spending number was lower than expected but could be due to several factors such as people doing holiday shopping earlier in the holiday season (October) and Amazon holding its second prime day in October.
- The big item, the PCE price index, rose 0.1% in the month and up 5.5% from a year ago, down from a high of 7.0% in June. Core prices up 0.2% in the month and 4.7% from a year earlier, although slowing from 5.0% the previous month is still higher than expected.
- The preliminary read on Durable goods orders for November, which gets revised in the factory orders data release, showed orders were down 2.1% in the month, the largest decline since April 2020 when it declined by a record amount. Transportation was the issue, orders excluding the volatile category were up 0.2%, while nondefense ex-aircraft orders, a better picture of capital spending, were up 0.2% and better than expected.
- The final read on the December consumer sentiment index, based on a survey of consumers feelings and expectations on the economy, was 59.7, up from 59.4 in the mid-month reading, but still a depressed reading. The current conditions index was 59.4, down from 60.2, while the expectations index was 59.9, up from 58.4. More importantly, inflation expectations improved, but remain elevated, with the one-year ahead inflation expectation at 4.4%, down from 4.6% last month, and the five-year ahead expectation at 2.9%, down from 3.0%.
- The average 30 year prime mortgage rate was 6.31% last week, down from 6.33% the prior week and down from 7.08% just a month and a half ago.
- The Wall Street Journal reported Delta is looking to be the first airline to offer free WiFi on its flights next year. It is testing WiFi infrastructure and plans to initially offer the free service on a significant portion of its planes before the service rolls out to more of its fleet next year.
- After multiple reports throughout the week, it was confirmed by the NFL and Alphabet that YouTube, owned by Alphabet (parent company of Google), secured the rights to the NFL’s Sunday Ticket. The NY Times reported Google has discussed paying $2.5 billion per year for the package, up from the $1.5 billion AT&T (DirecTV) is currently paying.
- Shares of Cleveland Cliff’s moved higher last week after saying it will see higher fixed prices for steel in 2023, with an average selling price 7.7% higher than 2022, and says its costs will be “significantly lower” in 2023 than they were this year.
- Wells Fargo agreed in a settlement with the Consumer Financial Protection Bureau to pay a civil penalty of $1.7 billion over matters related to fees/interest charges on loans and consumer deposit accounts. The bank is still dealing with legal challenges over its previous sales practices and will still have a $1.95 trillion asset cap in place by the Federal Reserve until it can prove it has systems in place to prevent sales abuse practices.
- In its latest quarterly earnings report, memory chip maker Micron reported lower sales and earnings than expected due to an oversupply of its chips after a global shortage for much of the past 18 months, said it would take “decisive action to cut” supply and expenses including cutting 10% of its staff, and suspends its share buyback program. It did however say it expects “gradually improving demand trends” over the upcoming months but it will remain a challenging environment.
- An Axios report says Michael Bloomberg is said to, due to his belief the merger deal between News Corp and Fox will fail, be interesting in purchasing Dow Jones or the Washington Post. News Corp is the parent company of Dow Jones, which owns papers such as Wall Street Journal, Barron’s, and MarketWatch.
- Congress passed a $1.7 trillion government spending package that averts a government shutdown, sending it to the President to sign. The package includes another $45 billion for Ukraine in its war against Russia, legislation on retirement savings, among other items such as banning TikTok from government devices and removing the vaccine mandate for the military.
- One of the more dovish central banks around the globe, and the last central bank from a developed nation to still have not raised short term interest rates, the Bank of Japan, got a little hawkish and said after its policy meeting it will keep short-term rates at -0.1% but it will widen its yield curve tolerance range to ease the cost of prolonged monetary stimulus. It has been since 2016 that the BoJ has pegged its 10-year government bond yield to as close to 0% as possible with a range of +/- 25 basis points but it will now let the yield float +/- 50 basis points (it will allow the 10-yr government bond yield to rise to a max of 0.50%). The yield has been at 0.25% for some time and after the announcement immediately moved to 0.40% while the yen spiked close to 4%, and stocks fell 2.5% in Japan. In the BoJ’s statement on the decision it did not mentioned inflation, rather the move was due to the discrepancies between the 10-year bond and yield on other maturity bonds and suggested it did not want the move to be taken as a step toward monetary tightening.
Economic & Market Outlook Meeting
Wednesday, January 18 – 6:00 pm – WFG Auditorium in Hudson, OH
Tuesday, January 23 – 12:00 pm – WFG Auditorium in Hudson, OH
Wednesday, January 24 – 6:00 pm – WFG Auditorium in Hudson, OH
Wentz Financial Group will be holding its semi-annual Economic and Market Outlook Seminars on the dates above. Join us as we recap a volatile 2022, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in the challenging year ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.
The Week Ahead
As usual for the week between Christmas and New Years, it will be one of the quietest weeks of the year. There is nothing to note on the corporate calendar while the economic calendar is very light of data releases. Markets were closed yesterday (Monday the 26th) and will be closed next Monday as well in observance of New Years Day. The only data releases this week are the Case-Shiller Home price index on Tuesday, the pending home sales index on Wednesday, and weekly jobless claims on Thursday.