Santa comes early to Wall Street
The bullish momentum that has driven equities higher over the last two weeks is beginning to slow down. That does not mean this bull run is over. It is just catching its breath.
The gains registered by stocks have been breathtaking. The S&P 500 Index has won back all its losses since October. It has risen more than 8% so far heading into Thanksgiving.
Normally, this kind of action would have been reserved for the latter part of December during the yearly 'Santa Claus Rally,' which occurs from mid-December into January of the following year. The moves higher have been bolstered by a lot of positive news this week.
Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in cooler than expected in October, which was contrary to economists' expectations. Only 7 of the 31 core components of the CPI registered inflation. The used car and housing components are the most important indicators to me. Those two carry a lot of weight in the index. The downsize inflation surprise supports the bulls' case that the Feds' actions to beat down inflation are making headway. But there was more good news as well.
Last Friday after the market closed, the credit agency, Moody's Investors Service, lowered its outlook on the U.S. government debt to negative from stable. They cited the cost of rising interest rates and political polarization in Congress. Readers may recall my column of a few weeks ago in which I worried that Moody's might follow credit agencies, Fitch and Standard and Poor's in reducing the country's AAA rating. Fortunately, the agency maintained its rating despite the negative outlook.
While not good news, it was better than many, including myself, had feared. One wonders if Moody's negative outlook might have helped break the political shutdown logjam in Washington since Tuesday saw the surprise passage of another continuing resolution by both the House and the Senate. The strong bipartisan vote averts a government shutdown until next year. That will hopefully give the politicians time to pass the 12 appropriations bills needed under regular order. This removed yet another concern for investors.
On the macroeconomic front, the weekly jobless claims, another closely watched indicator, rose to a three-month high. U.S. industrial output fell the most in 4 months and U.S. Manufacturing declined another 0.7% from a month earlier, which was more than the 0.3% decline expected. While all this data is bad news for the economy, the financial markets liked what they heard. It indicates that the economy is slowing, which should put the Fed on hold as far as future monetary tightening.
In the background, as all these developments kept interest rate yields in check, a steady decline in energy prices this week heartened investors’ outlook on the inflation front. Energy prices are instrumental in the inflation equation, so declines in the oil price will have an impact on expectations of further declines in inflation. My downside target for oil is $70/bbl. between now and the end of December.
At the end of the week, a bout of mild profit-taking finally occurred in the markets. Readers should welcome this behavior because equity prices were stretched to the breaking point. Thanksgiving week could be choppy, but the trend is still up. My next target on the S&P 500 Index is 4,550. Once, we have touched that level, we should back off, possibly a decline of 100 points to 4,450, on the S&P 500 as a guess. However, that would be a dip to buy because I see 4,600 to 4,800 before this bull run is over.
I won't be publishing my column next week. I will be traveling to the Big Apple to spend the holiday with my family, so I want to wish you and yours a Happy Thanksgiving.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.