No Ugly Sweaters for This Market: Trade Deal, Retail Sales Help Fuel Optimism

This morning, investors are returning from a holiday break apparently with optimism as the expected trade deal signing nears and data have shown strong holiday retail sales.

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5 min read
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Key Takeaways

  • Data show U.S. holiday retail sales grew 3.4% excluding automobiles

  • Volumes could be thin again as holiday week continues

  • Initial weekly jobless claims come in as expected

(JJ Kinahan is out of the office today, so Alex Coffey, sr. specialist, Trader Group, is filling in).

(Thursday Market Open) Christmas may be over, but that doesn’t mean there’s necessarily a lot happening on Wall Street today and tomorrow. In fact, the atmosphere might resemble an extended holiday, with many people still out and volume probably lighter than usual. Hours go back to normal, however, after a shortened session on Tuesday followed by the Wednesday market holiday.

There aren’t any major earnings releases the rest of this week, and few next week. Economic data reports will be limited as well, but weekly jobless claims this morning could get a closer look because last week’s 234,000 was well above what investors have been used to this year. The four-week moving average going into this week was 224,000, up from 218,000 in early November. 

This morning’s data showed initial claims coming in right at a Briefing.com consensus of 222,000, down from a slightly upwardly revised previous figure of 235,000. Continuing claims fell to 1.719 million from an upwardly revised 1.725 the prior week. 

Christmas Eve featured quiet trading in a session that ended at 1 p.m. ET, a couple of hours earlier than normal. The light price movement was definitely a big contrast to a year earlier, when the S&P 500 (SPX) plunged 2.4%. It’s up around 37% since then in one of the quickest and most impressive recoveries many investors probably have ever seen.

Consumer Strength Continues

Easing monetary policy by the Fed, low inflation, employment growth, and U.S. consumer health, along with signs of the trade war easing, all helped contribute to this remarkable turnaround.

In another sign of consumer health, U.S. retail sales grew 3.4% excluding automobiles, with online sales increasing 18.8%, year-over-year from Nov. 1 through Christmas Eve, according to Mastercard SpendingPulse. 

The U.S. consumer has been buoyed by a strong domestic jobs market. When people feel secure about their employment, they’re more likely to be willing to spend money at the store, or increasingly at the computer.

Low Volumes, Low Volatility

Volatility has been low all week, as might be expected this time of year when things are quiet. The Cboe Volatility Index (VIX) has hovered above 12 after falling below that level last week. The dollar index, which had tested 97 earlier this month in a move that looked like it might be bullish for stocks, continued to hold its own, trading near 97.65 as of midday Tuesday.

From a sector standpoint, nothing really remarkable stood out Tuesday, but semiconductor stocks continued to look strong. The PHLX Semiconductor Sector (SOX) hit a new 2019 high, helped in part by Advanced Micro Devices(AMD), which climbed 2% after a Wall Street firm raised its price target for the company.

We’re in the traditional “Santa Claus” period for the market, which runs the last five trading days of the year through the first two trading days of January. Though nothing is guaranteed, this stretch often tends to be strong. That might help explain the lack of selling pressure earlier this week, Briefing.com noted. However, it’s also possible some of the enthusiasm got pulled forward into earlier this month, and lack of major catalysts could make it more challenging for gains to get extended.

CHART OF THE DAY: SAME HOLIDAY, DIFFERENT MARKET. On Christmas Eve, one year after carving a low down below 2350, the S&P 500 Index (SPX—candlestick) traded well above 3200, a gain of more than 37%. Meanwhile, the Russell 2000 (RUT—purple line), which had lagged behind the SPX much of the year, still does, but recently posted 52-week highs of its own. Data Sources: S&P Dow Jones Indices, FTSE Russell. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Flying Under the Radar: You could argue that Lockheed Martin (LMT) shares had recently been like one of the company’s stealth aircraft: a bit hard to see in a market full of high-fliers. The stock was stuck in a range of between roughly $370 and $390 a share for most of the Q4 after a steep ascent earlier in the year. However, shares went into a nice climb earlier this week, rising nearly 2% following a couple of bullish news developments. The company was awarded a $1.96 billion contract to build four multi-mission surface combatants for Saudi Arabia, Defense News reported last Friday. In addition, LMT received a contract valued at $7 billion for sustainment of the F-22 fighter plane of the U.S. Air Force, the Defense Department announced. LMT, whose shares fell back a bit Wednesday in light volume, might also have gotten a lift from the geopolitical situation as things flared up a little recently with more North Korean missile threats. When the going gets tough internationally, investors sometimes look for defense—defense stocks, that is. 

Why Risk It? While stocks remain near record highs, certain risk  metrics have gained ground. The 10-year yield, which moves in the opposite direction of the underlying Treasury product, fell back toward 1.9% on Christmas Eve, while gold climbed back above $1,500 an ounce for the first time since November. As we noted earlier this week, it looks like investors might be trying to have it both ways, with one foot on the playing field and one foot out-of-bounds. The continued risk-off strength could reflect concerns about some weak U.S. data Monday, with new home sales and durable goods both missing analysts’ expectations.

Save on the Heating Bill: Spring-like weather across the Eastern half of the country helped send natural gas futures (/NG) down to their lowest levels since August this week. The commodity fell to around $2.185 per million British thermal units on Tuesday, and is down about 30% from a year ago as supplies remain abundant. That price is well below where /NG traded two decades ago as the 20th century ended. One question is whether the price can fall below $2, which hasn’t happened since May 2016. As CNBC pointed out in an article earlier this month, almost every type of trade has worked on Wall Street this year, but natural gas is one of the few exceptions. If you were long /NG in 2019, the one consolation could be in your December home heating bill, which might be down substantially from a year ago. If you live in Alaska, however, forget that. Temperatures are supposed to fall to negative-40 in Fairbanks next week, according to The Weather Channel.

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Data show U.S. holiday retail sales grew 3.4% excluding automobiles

  • Volumes could be thin again as holiday week continues

  • Initial weekly jobless claims come in as expected

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