The markets are poised to close out 2019 at record highs … unless trade war drama derails it
Though the situation seems to be changing by the moment, as I write Friday morning, it appears we have a phase one trade deal with China … though not yet officially signed.
It began yesterday, with stocks hitting all-time highs based on Trump’s tweet about an impending trade deal …
By early evening yesterday, a phase one deal had allegedly been reached. Stock market futures were up.
But then this morning, Trump tweeted that The Wall Street Journal story about the trade deal had incorrect information.
Yet, by mid-morning Friday, Trump confirmed a phase one deal had been reached.
At the time of this writing, the Dow has been all over the place, reacting either to tweets or emerging details of the agreement.
Below, you can see the Dow jumping 200 points off the bell before falling nearly 170 points.
It appears that, once signed, the phase one deal will remove tariffs on Chinese goods in stages. In return, China will increase U.S. imports. Though additional details may become clear later in the day, at present, things are a bit murky and I’m finding inconsistent reports.
Regardless of what we learn, as we’ve noted here in the Digest, this phase one agreement won’t address the real, thorny issues between the U.S. and China. That said, let’s not jump ahead of ourselves. There’s finally some progress, so let’s enjoy it for the moment.
Meanwhile, Wednesday saw no surprises from the Fed’s last policy meeting of the year. And yesterday, the ECB held rates steady in Europe, so no fireworks there either.
Finally, in a surprising twist out of Britain, Boris Johnson won the UK election last night in a landslide victory. The short takeaway is he’ll be able to push Brexit through Parliament with no further delays or additional drama (hopefully).
Put all of this together, and it appears there are many factors supporting a Santa Claus rally through year end … barring a trade deal meltdown.
But for more details, let’s turn to John Jagerson and Wade Hansen of Strategic Trader. John and Wade are our resident market technicians, using charts and historical data to get insights into where markets are headed next.
On Wednesday, they updated their Strategic Trader subscribers with how the Santa Claus rally is shaping up, and what to expect as 2019 closes out.
Will the good cheer from this string of positive news propel the market to record highs for the rest of the year? Let’s find out.
***Which Santa Claus rally are you referencing?
What many investors may not realize is there are actually two potential Santa Claus rallies we could discuss. As John and Wade clarify in their update, the term “Santa Claus rally” was originally coined by Yale Hirsch in 1972 in The Stock Trader’s Almanac.
By that definition, a Santa Claus rally occurs (or doesn’t) during the last five trading days of the old year and the first two trading days of the new year.
The market’s performance over this period is supposed to be an indicator of how well the market will perform of the coming year.
However, as the years have passed, many analysts have adopted a different definition — namely, it’s that period of time beginning with Black Friday.
Which definition do John and Wade prefer?
With all due respect to Hirsch, we’re going to stick with the new definition of the “Santa Claus rally” for two reasons.
First, we don’t think you can know with any degree of certainty how well the stock market is going to do during a given year by watching the performance of the market during a span of seven trading days.
Second, the impact of the economic forces most closely tied with Santa Claus — shopping, shopping and more shopping — is felt on Wall Street before Christmas, not after.
So, for some quick context, where are we today by this definition of the Santa Claus rally?
Below, is the market’s performance since Black Friday. Though we’ve pushed higher in December, the reality is we’re only back to post-Thanksgiving levels.
Given this, if we’re going by the book, this Santa Claus rally hasn’t really kicked in yet.
So, let’s dig a layer deeper now, and look at the primary engine of the U.S. economy — consumer spending.
***The Santa Claus rally viewed through a retail lens
In their update, John and Wade describe the chain reaction that typically leads to a Santa Claus rally.
Retail stocks are often the ignition switch that gets the chain reaction started. Nearly 70% of the gross domestic product (GDP) in the United States is driven by consumers.
If consumers are confident in their financial future, they tend to spend more. If consumers are concerned about their financial future, they tend to spend less.
At no time is this more apparent than during the holiday shopping season. This is the time of year when retailers tend to make the majority of their profits for the year. If consumers show up and spend lots and lots of money to play Santa, retail stocks tend to rise.
This sends a signal to the rest of the market that consumers are confident and that economic growth in the U.S. should be strong. This then leads to other stocks in the market doing well with the expectation of a strong GDP, and voila, a Santa Claus rally.
How have retail stocks been doing then?
Let’s start broad. XRT is the SPDR S&P Retail ETF.
Below, we compare XRT to the S&P starting at the beginning of the fourth quarter.
As you can see, it’s on par with the S&P, both coming in around 6% gains. It was actually ahead of the S&P as of yesterday, but it’s selling off Friday morning.
Can we learn anything by going more granular?
For that, let’s go back to John and Wade:
Interestingly, even though Santa is most likely to be found at the mall, the mall’s high-end anchor retailers — like Nordstrom (JWN) and Macy’s (M) — aren’t the ones who are feeling the most Christmas cheer on Wall Street.
Instead, the upper mid-range retailers — like Target (TGT) and Costco (COST) — are the ones flying up to the housetops this year.
You can see the difference in performance for 2019 by looking at the comparison chart in Fig. 1.
Fig. 1 — Comparison Chart of TGT, COST, JWN and M — Chart Source: TradingView
Looking at the chart, you can see that JWN and M have been falling for most of 2019 while TGT and COST have been climbing.
However, if you look at the performance of all four stocks during the last few months, you’ll see that TGT, COST and JWN have all been climbing higher since late August, and M has stabilized. This is a good sign.
The rebounds and stabilization show that consumers are shopping. If they keep shopping through the holiday season, traders are likely to keep pushing stock prices higher across the market in anticipation of stable economic growth during 2020.
If we digress from retail stocks momentarily and simply look at retail numbers, the National Retail Federation recently reported that Thanksgiving weekend drew nearly 190 million shoppers — that’s up 16% from last year, setting a record.
Given this, with 70% of the U.S. GDP being driven by shoppers, that’s certainly a good sign.
***Will a rally take extend through year end?
In Tuesday’s Digest, we noted how this week was bringing lots of question marks — the Fed, the ECB, the British vote, the trade agreement deadline …
As we look today, all of these issues have played out relatively well — though, at the moment, the trade deal still feels a bit tenuous.
But barring a meltdown there, it appears we’re in for a Santa Claus rally — or as John and Wade ended their update …
We expect more bullish momentum through the end of 2019.
Have a good evening,
Jeff Remsburg
