How long will the ‘Santa
Clause’ rally last?
Stocks broke their losing
streak and rallied on the long-awaited Fed taper and positive economic news.
The S&P 500 and Dow both finished out the week at record closes.[1]
For the week, the S&P 500 gained 2.42%, the Dow surged 2.96%, and the
Nasdaq grew 2.59%.[2]
Stock market activity last week shows
that good news may finally be good news for markets. The other shoe finally
dropped on quantitative easing; the Fed announced a modest taper of $10
billion, reducing the size of its monthly bond purchases to $75 billion. In
order to make the tapering pill easier to swallow, the Fed pledged to keep
rates near their current levels until the headline unemployment rate declines
below 6.5%. If the Fed continues to wind down purchases by $10 billion per
Federal Open Market Committee (FOMC) meeting, that would put an end to
quantitative easing by late 2014.[3]
Stocks rallied on the news, taking it as an emphatic vote of confidence on the
economy by the Fed.
In
other Fed-related news, Janet Yellen, the nominee for chair of the Federal
Reserve, cleared a major hurdle last week as the Senate voted to move forward
with the nomination. A final vote is set for January 6 when the Senate returns
from a holiday break.[4]
Yellen is an experienced Fed hand, and it’s likely that her main focus as chair
would be to keep the Fed on a slow and steady path.[5]
In
Washington
On
the economic front, markets surged when revised Q3 Gross Domestic Product (GDP)
numbers were announced. New estimates of third quarter GDP growth indicated
that the economy grew 4.1%, its fastest pace in almost two years. Economists
increased their estimates of business and consumer spending as well as exports,
which show that the economic recovery is still steaming along.[7]
Looking
ahead at the holiday-shortened week, there’s not a lot of economic data on the
wire, and it’s likely to be a slow week. Regardless of what happens in the final
weeks of the year, 2013 will stand out as a banner year for equity performance.
It’s hard to know whether to expect a correction at the beginning of the year,
but a pullback could provide good buying opportunities as long as fundamentals
remain strong.
ECONOMIC CALENDAR:
Monday: Personal Income and Outlays, Consumer
Sentiment
Tuesday: Durable Goods Orders, New Home Sales
Wednesday: All Markets Closed for Christmas Holiday
Thursday: Jobless Claims, EIA Petroleum Status
Report
HEADLINES:
Weekly
unemployment claims rise. According to the most recent Labor
Department report, initial unemployment claims rose to their highest level
since March. Other labor market indicators show improvement, leading economists
to largely discount the increase and attribute it to seasonal factors.[8]
Home
resales fell in November. Sales of previously owned homes fell in
November by 4.3% to the lowest level since December 2012. This was the third
straight month of declines as rising interest rates dampen homebuyer activity.
However, analysts believe that housing market fundamentals remain solid and
that demand for housing still exists.[9]
Retailers
pull out all the stops to lure shoppers. Retailers are down to the
wire and are making serious last-ditch efforts to bring in more sales. Many
retailers are advertising half off coupons and deals similar to those available
on Black Friday. Early data suggests that the holiday shopping season has been
soft, leading to aggressive promotions.[10]
EU
loses AAA rating. Ratings agency Standard and Poor’s
downgraded the European Union’s sovereign credit rating to AA+, citing tensions
between member states and a deteriorating financial situation. S&P had
recently cut its ratings on the Netherlands
and France
“A dream doesn't become reality through magic; it takes
sweat, determination
and hard work.” - Colin Powell
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