Stocks swept higher again on Monday in very quiet pre-holiday trading. With no substantial negative news to offset last week’s momentum, shares continued to move higher, led by the Nasdaq and the small-caps.
Expect the rest of the week to be quiet as well, with low trading volume and subdued news flow due to the holidays. The markets will close at 1:00 p.m. ET on Christmas Eve, and will remain closed on Wednesday for Christmas. As a result, Wall Street tends to empty out, which is why volume is way down.
The big news Monday came from Apple (AAPL), which announced a multiyear iPhone sales agreement with China Mobile (CHL), the largest mobile vendor in that country. Apple shares shot higher by 3.8%, and brought with it all of its component suppliers, including NXP Semiconductor (NXPI).
As for the holiday buying season, well, it’s been a fairly tough stretch for most retailers not named Amazon (AMZN). It was reported today that U.S. consumers purchased less on the final weekend before Christmas than last year despite substantial discounts.
RetailNext reported that U.S. retail sales at brick-and-mortar stores on Friday and Saturday, which are two of the four most important shopping days of the season, were lower year over year by around 5%. Store visits were down 7% year over year. Online sales, however, have remained strong despite an intensely promotional environment (i.e., there is a lot of dramatic discounting going on).
Elsewhere in the world, IMF chief Christine Lagarde was optimistic over the weekend in an interview about the global economy, which is rare for her. She cited a pickup in U.S. growth and falling unemployment in making the case for a bullish global economic outlook. She also stated that the Fed’s tapering announcement and the budget deal in Washington provided “more certainty for 2014.”
Lagarde is definitely on the right track about the Fed. The announcement of what I would call “taper lite” last week removes a high-profile overhang from the market. And it was helped by the fact that Fed officials paired it with enhanced forward guidance that kept a focus on the extremely gradual nature of the interest rate normalization process ahead.
The taper caper was also boosted by the fact that it signaled that the Fed sees a strengthening economy ahead, a view that was backed up with support from positive new data on enterprise technology spending, as well as a busy week in mergers and acquisitions.
The decision was obviously a big surprise to the market — otherwise there would not have been such an outsized reaction. This is kind of odd when you consider that investors have had six months to think about tapering since it was first run up the flagpole by Fed chairman Ben Bernanke in June.
Two points I want to make about that:
- This was actually the second time in a row that the Fed has defied the conventional wisdom. The first was back in September when the consensus expected a taper and didn’t get one; the second was last week when the consensus didn’t expect a taper and did get one. In short, the consensus has had a tendency to be very wrong about Fed action, and thus it behooves us to have an alternative point of view that fits the facts in an unconventional way.
- The Fed appears to have tired of quantitative easing but has not tired of providing a very accommodative monetary policy. It has basically decided to adjust its “mix of instruments,” in the jargon of monetary policy officials. The central bank may be a bit more skeptical of the utility of QE, but it has decided that providing firmer guidance about how long it intends to keep interest rates low — i.e. “well past” the 6.5% unemployment level — provides stimulus at a lower cost.
In other words, the market has rallied since Wednesday because the amount of stimulus hasn’t changed, only the way it is delivered.