A December to Remember… Or Not

By December 28, 2018 Weekly TGIF

This has absolutely been a December to remember. And perhaps forget. At least for investors.

How do you follow the worst Christmas Eve trading session in history? How about a 5% rally which sent the DOW up over 1,000 points in a day for the first time ever. That was Wednesday. It didn’t end there. Thursday saw a natural early morning sell-off following the monster move higher. But the selling gained momentum and all of a sudden the DOW was down 600 points and the S&P gave up the psychological 2400 level. It felt like the bottom was going to fall out again and the post-Christmas rally was a total fake out. But not this time. The sharp declines reversed hard with another acceleration to the close and the major indices launched the biggest intra-day move in a decade to close in the green again. Two straight days of gains. That was the first time it occurred this December. It was really something.

The 116 point gain for the S&P on Wednesday was also the largest one day gain in history and only the second time it jumped over 100 points on the day. The other time was during the Financial Crisis in October of 2008. The fact that the DOW and S&P simply closed positive on Wednesday was encouraging. Previously every rally had been sold. Selling in December had been absolutely relentless. The fact that gains accelerated throughout the day and exploded to the close was extremely significant. The DOW and S&P posted their biggest percentage one-day gains since March 2009. That was when the Bull Market was born. Equally important, the gains that continued Thursday and Friday did nothing to hinder the positive momentum into the weekend. Building on gains is significant.

Volatility works both ways. Keep in mind, the 6% jump since Wednesday merely gets us back to where we were just last week before the bottom fell out. This is tracking to be the worst month for stocks since 2009. It’s also the worst December for stocks since 1931, during the Great Depression. These were both crisis periods. This is crisis-like price action, but we still don’t think this is a crisis period anything like the Great Recession or the Great Depression. Not even close. But we do believe this is a Bear Market. We’ve said it many times, Bear Market rallies can be some of the most powerful. This is one of them. This rally has been quite soothing and is providing some much-needed breathing room to operate. There was a great deal of fear, if not panic, in this Market the last couple of weeks. Fear tends to be rally food.

Though growth is clearly slowing, there are no signs of recession in the US right now. Providing a catalyst this week was really strong retail numbers reported for December. Despite the massive Market sell-off, the American consumer kept spending for the holidays. Retail sales grew at the highest rate in 6 years. Amazon reported a record-breaking holiday season suggesting consumer optimism hasn’t fallen materially. Amazon has experienced strong activity from the start this holiday season, with November’s Cyber Monday marking the company’s biggest shopping day in history. Along with the Christmas sales report, the picture seems much brighter than Amazon had initially projected in its year-end forecast. Mastercard said holiday sales increased 5% to more than $850 Billion this year. $850 Billion is a big number, and remember, consumer spending represents 70% of the US economy. This is also the strongest growth it’s experienced since 2012. Mastercard also said online sales grew 19% from last year. You’ve no doubt noticed all the package deliveries throughout your neighborhood with delivery vans and trucks in constant motion. That’s certainly a trend showing no signs of reversing. UPS said it expected to deliver an average of more than 31 Million parcels a day during the holidays and anticipates a peak-season total of about 800 Million packages which would be an increase of 5% over last year.

Back to the Market: The S&P 500 remains roughly 15% from its all-time high reached in September. A bottom could be in. We’re not so sure. Of course, many on the Street are saying it is. But people have been calling bottoms all along, and few saw the carnage of Q4 coming. The selling last week off the Fed meeting was what really surprised us. That period has basically been erased with the gains this week. There was clear short-covering this week, which contributed to the acceleration. Where we go from here is critical. The gains were powerful and confidence is still very low. There’s also been tax selling at play which is typical at year-end. But we will be paying close attention to see if big buyers show up in the new year. Getting back above 2500-2530 S&P would be technically significant. Earnings Season starts up in January, which will provide the opportunity for companies to report facts and provide perspectives on the future. There is a great deal of uncertainty these days, economically, politically and geopolitically. Chances are, guidance is going to be cautious. Who could blame them? But the Market has gone a long way to price in many negatives. Perhaps Earnings Season will provide the necessary evidence that issues remain but a crisis this is not. The American Consumer has provided some clues already.

There is just 1 trading day left in 2018 before we can officially say good riddance. At this point, we would love to see some stable and boring days. Unfortunately, we think it will still be a little while longer for that. We expect this volatility to continue as this Bear Market rolls along. We’re survivors. We’re surviving just fine and continue to protect your life-savings from this short-term Bear until it reverts back to the long-term Bull.

Have a nice weekend. We’ll be back, dark and early on Monday to close out a challenging year.

Mike