We can probably thank Friday’s University of Michigan Consumer Sentiment number for December, which rose sharply toward its highest level since 2004. Economists were looking for a 95.0 reading, which would have been up from the previous 93.8, but the blowout 98.0 level said a lot about the renewed optimism we are seeing in consumers and the broader economy. The post-election stock market rally may have helped fuel some of this consumer optimism, but whatever may have caused this rise in sentiment, there are few bulls complaining. The stock market was looking for affirmation of the big, one-month bounce, and consumers gave a resounding “thumbs up” to the stock market rally.
We witnessed new, all-time highs in the Dow, the Nasdaq, the S&P 500, the Russell 2000 and the Dow Transports, which as we have mentioned, is a fairly rare occurrence. Friday’s rally closed us out with weekly gains of 3.1% for the Dow, 3.6% for the Nasdaq and 3.1% for the S&P 500. It was a great way to close out the week on Friday, and it is clear that the Santa Claus Rally is airborne in this holiday season. Historical winds have always favored the stock market during this time of year, and bulls are thrilled that those winds have kicked in so resoundingly so early in the month of December.
The Federal Reserve is expected to raise rates by a quarter of a point when it concludes its meeting this coming Wednesday, and the stock market, at its new highs, will likely take that hike in stride. The recent rise of the yield of the 10-year U.S. Treasury has popped up to 2.46%, so the “free market” has already raised rates by quite a bit. If the Fed were NOT to raise rates next week, it could actually cause a selloff in stocks. This is quite a different scenario than last December, when a single 25 basis point rate hike by the Fed sent the stock market into a “tantrum” that subsequently took the S&P 500 down by around 10%.
This December is quite different from last year’s December, and with stocks rocking and the economy looking relatively strong, a rate hike will not likely have much of an effect. In fact, maybe a couple more rate hikes in early 2017 might not cause that much trouble either. This is a positive because the distortion of having “near zero” interest rates for eight years has not been all that “normal.” It has hurt smaller banks, insurance companies and people who save money by putting it in the bank. The normalization process has been a long time coming, so maybe higher rates will help the economy (and the stock market).
Before we get too “euphoric” about this current stock market rally, many bulls are wondering just what could “go wrong.” Well, not to sound like a Grinch, it is precisely when it seems like nothing can go wrong that “something goes wrong.” Some strategists say that more Brexit-style votes in Europe could occur in 2017, and the last thing the global economy wants to see is a breakup of the EU, despite the fact that that scenario might be what some European voters want. The ECB met this past week, and the press releases and plans were confusing and convoluted as usual, but the ECB and the EU have become experts at sounding great with short-term solutions.
Another thing that could go wrong is that if rates in the U.S. rise sharply on the long-end of the yield curve, DESPITE what the Fed does with the short end of the yield curve, it could spook investors. Higher 10-year U.S Treasury rates could hurt housing, corporate bond offerings, and consumer lending as well. With a new president in 2017, we will likely see some big policy changes, and so far, the stock market and investors seem very pleased. It will be interesting to see what a Trump Presidency brings, but the stock market is currently giving an optimistic response to the change.
On the other hand, what could “go right” for the stock market? Well, the first thing we are seeing is a renewed confidence in investors and consumers, and maybe confidence really is the “key” to invigorating a stagnant economy. Who knows, but change and new challenge are usually healthy for a free market economy. That said, let’s hope Santa and his sleigh (Rudolph leading the way) can keep this rally heading higher into New Year’s Day. The Gorilla wishes each and all a relaxing pre-winter weekend, and hopes you have a fun-filled holiday season. We will be back in action on Monday, and hats off to having the majors hitting all-time highs this week! Happy Holidays!
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