The stock market's November rebound stalled last week. Equities were arguably short-term overbought considering the prior week's big surge higher. It wasn't too surprising to see the U.S. market consolidate sideways. On Tuesday the market saw a small knee-jerk reaction lower on news that the country of Turkey had shot down a Russian warplane for allegedly violating their airspace. Thankfully the weakness didn't last long. Big cap stocks spent the holiday-shortened week drifting sideways. Meanwhile a bounce in biotech stocks (+2.7%) helped lift the small cap Russell 2000 to a +2.3% gain on the week.
Overall it was a relatively quiet week on Wall Street. The media was focused on the upcoming Black Friday sales event. There was an undercurrent of caution as Americans quietly worried about a potential Paris-style terrorist attack during the Thanksgiving holiday and Black Friday time frame.
Just ahead of the holiday the U.S. State Department issued a worldwide travel alert for Americans warning everyone to stay vigilant and cautious, especially around large crowds and public transportation. This headline pressured airline stocks lower.
Black Friday Impressions
Consumer spending makes up about 70% of the U.S. economy. While most of that is routine spending on goods and services, Wall Street loves to focus on discretionary spending. The Thanksgiving holiday (and Black Friday) kicks off a four-day sales event that officially starts the holiday shopping season. This time period (Thanksgiving through Christmas) can account for 20% to 40% of annual sales for many retailers.
This year it appears that a number of consumers chose to stay home during the annual shopping extravaganza. Initial reports suggested that malls and retailers saw 10% less foot traffic and lower sales. ShopperTrak, a retail research firm, is estimating that Black Friday sales for brick and mortar retails fell from $11.6 billion in 2014 to $10.4 billion in 2015.
There are multiple reasons that might account for the decline. First of all, Black Friday sales have morphed from a one-day event, to a weekend event, to a full week event. Many retailers began their Black Friday discounts in the days prior to Thanksgiving.
There was also a significant surge in online shopping. More and more consumers find it easy and convenient to shop online. That way they can view Black Friday sales from the comfort of their own home instead of braving the crowds and the cold to stand in-line. Some estimates suggest online sales rose +14% this year. That number is likely to rise with "Cyber Monday" tomorrow. The idea is that employees return to work and spend Monday shopping online from the office.
Another reason for the decreased foot traffic could also be terrorism fears. The last couple of weeks with the Paris attack and ISIS headlines threatening to hit the U.S. plus headlines about refugees and illegal immigrants crossing the border might have kept some people at home this weekend.
There were a number of economic reports last week. The second estimate on U.S. Q3 GDP growth was revised higher from +1.5% to +2.1%. This helps support the Fed's desire to raise interest rates. Unfortunately the manufacturing data does not. The flash manufacturing PMI data from Markit fell to a two-year low in November with a drop from 54.1 to 52.6. Numbers above 50.0 still suggest growth but it's moving the wrong direction. Another look at manufacturing saw the monthly durable goods orders rise +3.0% in October. This surge was driven by a big jump in orders for transportation goods. The core-durable goods number, which excludes the volatile transportation component, rose +0.5%.
Exiting home sales for October declined -3.4% from September to an annual rate of 5.36 million homes. New home sales went the opposite direction. September's new home sales was revised higher from 447,000 to 468,000. October's new home sales estimate hit an annual pace of 495,000. The Case-Shiller 20-city home price index surged +5.5% in September.
Personal income in October rose +0.4% but personal spending only rose +0.1%, which was below expectations. Meanwhile the most recent consumer surveys both retreated. The Conference Board's Consumer Confidence Index saw its October reading adjusted higher from 97.6 to 99.1. Unfortunately the November reading plunged to 90.4, the lowest number since September 2014. The final November reading on the University of Michigan Consumer Sentiment Index fell from 93.1 to 91.3.
The Atlanta Fed updated their weekly forecast on U.S. GDP growth. Last week their Q4 forecast was downgraded from +2.3% to +1.8%.
Overseas Economic Data
Economic data out of Europe was a little quiet. The Eurozone flash manufacturing PMI improved from 52.3 to 52.8, which was better than expected. The flash November services PMI also improved with a rise from 54.1 to 54.6. Numbers above 50.0 suggest growth. Eurozone consumer confidence was not so great but it did improve from -8.0 to -6.0. Meanwhile Germany reported their Q3 GDP rose +0.3%, which was in-line with estimates.
Looking East, we saw that Japan's preliminary manufacturing PMI for November improved from 52.4 to 52.8. The country's household spending for October plunged -2.4% from a year ago. The data out of China was also disappointing. The country reported that profits from their large industrial firms fell -4.6% last month. It was the fifth monthly drop in a row. The Chinese stock market was hammered lower on Friday with a -5.3% drop as investors reacted to news that the government was launching new investigations into several brokerages for wrongdoing. The high-profile brokerage stocks fell -10% or more.
Thanksgiving week proved to be very quiet for the S&P 500. The index gained just one point. That's enough for a +0.04% gain on the week. Year to date it's up +1.5%. If you look at an intraday chart (see below) the S&P 500 is fighting with a bearish trend of lower highs. The 2,095-2,100 zone is short-term resistance. If the S&P 500 can breakout we could see it surge toward its all-time (and 2015) highs in the 2,130 area.
Daily chart of the S&P 500 index:
Intraday chart of the S&P 500 index:
The NASDAQ composite managed a +0.44% gain for the week. This bumps the 2015 gain to +8.2%. This index also has a trend of lower highs but on a longer-term scale (see daily chart).
The 5,165 area is still overhead resistance. Beyond that we are looking at the July highs near 5,230 as potential resistance. I'd still watch the 4,900-5,000 zone for support.
chart of the NASDAQ Composite index:
Small cap stocks were some of the market's better performers last week. The small cap Russell 2000 index surged +2.3%. That erased most of its 2015 losses. Its year to date gain is now -0.19%. The $RUT is now up five days in a row and up seven out of the last nine sessions. You could argue this index is short-term overbought and due for a dip.
The $RUT closed Friday at 1,202. I'd like to see some follow through higher before calling that a breakout past round-number resistance at 1,200. I've been warning investors for weeks that it is the 1,200-1,220 zone that is overhead resistance for the $RUT. It's not out of the woods yet.
chart of the Russell 2000 index
Economic Data & Event Calendar
We have a very, very busy week for economic data and potentially market-moving headlines. It's the beginning of a new month and that means lots of monthly economic reports including the ISM index, the ADP Employment report, and of course the monthly nonfarm payroll number.
Last month Wall Street was only expecting +183,000 new jobs in October. The jobs report came in ahead of expectations at +271,000. This week economists are estimating the U.S. gained +200K new jobs in November. As long as this number doesn't crash it will probably be good enough for the Federal Reserve to raise rates in December.
Another potential market-moving event will be the European Central Bank meeting and its decision on interest rates. ECB President Mario Draghi has been hinting (multiple times) at boosting the central bank's QE program this December. How he plans to do that will be the real trick. This decision comes out on Thursday morning, before the opening bell in New York.
If you follow the oil market then the OPEC meeting on Friday could be interesting. Over supply of oil has helped push crude prices to six-year lows. No one expects OPEC to change their quota even though most of its members desperately need higher oil prices.
We will hear from multiple central bank executives this week including several from the U.S. Federal Reserve and from overseas. Bank of Japan Governor Haruhiko Kuroda speaks on Monday. Fed Chairman Janet Yellen always has the potential to move markets. She speaks twice this week on Wednesday morning and Thursday morning. Her Thursday appearance is before the congressional joint economic committee.
- Monday, November 30 -
Chinese manufacturing PMI data
Pending home sales
- Tuesday, December 01 -
Auto and truck sales
- Wednesday, December 02 -
ADP Employment Change Report
Federal Reserve's Beige Book report
Fed Chairman Yellen speaks
- Thursday, December 03 -
European Central Bank interest rate decision
Fed Chairman Yellen speaks
ISM services index
- Friday, December 04 -
Nonfarm payrolls (jobs) report
Additional dates to be aware of:
Dec. 16th - FOMC meeting, new forecast
Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)
Looking ahead seasonal trends favor the bulls. I noted in previous weeks that December is historically the best month of the year for both big caps and small caps. The research team with the Stock Trader's Almanac noted that the first few days of December normally sees a rally. Then there is a mid-month pullback followed by a surge higher into yearend.
Chart of historical market performance in December
The Grinch must have spiked the eggnog at Goldman Sachs because last week the influential investment bank issued a disappointing note on its 2016 stock market forecast. The S&P 500 index just closed at 2,090. Goldman Sachs is only forecasting a rise to 2,100 for 2016 - that is where they expect the index to end 2016. Goldman strategists believe that rising interest rates, a strong dollar, and lackluster corporate profit growth will leave stocks with a disappointing performance next year. The team and Goldman also noted that historically, when the Federal Reserve begins raising rates, the stock market tends to see its p/e multiple decline -10% in the six months following the first rate increase.
They do have a point with the rising dollar. Dollar strength has been a wet blanket on corporate results throughout 2015. When the Fed starts raising rates the dollar rally should accelerate, which will only exacerbate this effect. It's also widely known that historically stocks normally decline when the Fed begins a rate hiking cycle. You could argue that this time isn't normal. The Federal Reserve has not raised rates in almost a decade and we have seen multiple QE programs in the last several years. One could argue that "this time is different" but any Wall Street veteran will warn you that those are dangerous words for investors to believe.
In summary, the next few weeks should be higher with a pullback in mid-December before a yearend surge. Let's hope Santa Claus makes his normal appearance on Wall Street this year.
"If Santa fails to call, the bears will roam on Broad and Wall."
(old Wall Street maxim)