Seasonal:
Bullish. December is the number one S&P 500 (+1.6%) month and second best for DJIA (+1.7%) and NASDAQ (1.8% since 1971). Rarely does the market fall precipitously in December. The “January Effect” of small-cap outperformance starts in mid-December. Santa’s Rally begins on Monday December 24 and lasts until the second trading day of the New Year. S&P has averaged gains of 1.3% since 1969. In years when Santa Claus did not come to Wall Street, bear markets or sizable corrections have often materialized in the coming year.
Psychological:
Flat. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 38.3%. Correction advisors are at 41.1% and Bearish advisors are 20.6%. The slow unwinding of bullish sentiment, to the lowest level of bulls since early 2016, is a positive. This would suggest there is additional capital available on the sidelines waiting to be put to work (or short positions that will need covering) when the market begins to rally.
Fundamental:
Firm-ish. U.S. labor market remains quite firm with unemployment at just 3.7% and 250,000 net new jobs added in October. U.S. GDP is also ok with the Atlanta Fed’s GDPNow model forecasting 2.6% growth for Q4, but is slower than previous quarters. Housing and auto markets are also somewhat tepid. Crude oil’s decline is also noteworthy. Is crude merely reacting to excess supply and sluggish demand or is it possibly indicating slower global growth? Most likely crude’s sell off is an indication of excess supply and waning summertime driving season demand.
Technical:
Challenged. S&P 500 and NASDAQ are below their respective 50- and 200-day moving averages. DJIA reclaimed its 200-day moving average November 28. NASDAQ’s chart is the weakest with a “death cross” registering on November 27. One positive thus far is the lows from earlier in the year have held. A break out above early November highs, by all three indices that holds, would be bullish.
Monetary:
2.00-2.25%. The Fed remains the single biggest risk to the market and the economy. Rates do need to return to a neutral range, but exactly what neutral is remains unclear. Last month’s rather hawkish tone on interest rates has softened significantly this week as Fed Chairman Powell announced that the Fed’s benchmark rate was “just below the broad range of estimates of the level that would be neutral for the economy.” After nearly a decade at zero, a brief pause to evaluate the impact of recent hikes does not seem unreasonable.
DEC
2018