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Dow rallies nearly 3% on strong Thanksgiving shopping results

Wall Street makes its money on activity… You make your money on inactivity. – Warren Buffett

Strong retail sales over the long Thanksgiving weekend that culminated with Cyber Monday and high levels of consumer confidence enable the Dow Jones Industrial Average to break through the 24,000 barrier with a gain of almost 3% last week. The S&P 500 Index also ended the week with its eighth straight monthly gain while the Nasdaq Composite Index finished lower as investors took profits in the technology sector, which has been the best performing sector of the market this year. Retail stocks rallied as consumers spent a record $5.03 billion online during Black Friday and followed that on Cyber Monday with the largest online amount ever spent on a single shopping day. Data showed that online Black Friday sales rose nearly 17% from last year. All of this good news confirmed what many economists had been forecasting, namely that expected holiday spending should be the highest in a long time as consumers remain confident about the economy. This feeling was also evident in the Conference Board’s measure of consumer confidence, which was better than expected and rose to the highest level since November 2000. Optimism that the Senate would pass a tax reform package turned into reality as Senator Mitch McConnell said on Friday that the Republicans had enough votes to pass the Senate tax bill. The Federal Reserve was partly responsible for the positive week on Wall Street, too. The Fed’s Beige Book, which assesses the economy in each of the 12 Federal Reserve districts, indicated that there was a slight improvement in the economic outlook and that growth remained at a “modest to moderate pace”. It also acknowledged that inflation had picked up, but that wage gains were still modest and gave an upbeat outlook for the holiday shopping season. Newly appointed Federal Reserve Chairman Jerome Powell made positive comments about the financial sector during his confirmation process as well. He said that current regulations on banks are “tough enough” and was in favor of reducing some regulations to ease the burden on small banks. As a result, bank stocks rallied strongly on his statements. The only hiccup in the market last week occurred on Friday when former National Security Advisor Michael Flynn pleaded guilty to lying to the FBI and agreed to cooperate with the special counsel’s investigation of possible Russian collusion. The stock market fell hard on the news but by the closing bell, most of the losses had been erased.

Last Week

New home sales for October were strong as sales hit their highest level in a decade and pending home sales, which are signed contracts to buy existing homes, also rose and were at the highest level since June. The second reading of third quarter GDP showed that growth increased 3.3% compared to the initial reading of 3.0%. Weekly jobless claims fell 2,000 to 238,000, slightly less than expected, as layoffs remain near a 45-year low and unemployment remains at a 17-year low.

In her testimony before the congressional Joint Economic Committee, Fed Chair Janet Yellen said that the Fed’s goal is to continue to normalize monetary policy and move policy to a neutral level consistent with a strong labor market. She also indicated that interest rates should be raised gradually to avoid facing a situation where the Fed would be forced to raise rates quickly, possibly sending the economy into a recession.

For the week, the Dow Jones Industrial Average jumped 2.9% to close at 24,231 while the S&P 500 Index rose 1.5% to close at 2,642. The Nasdaq Composite Index dropped 0.6% to close at 6,847.

This Week

The most important piece of economic data this week will be the November employment report, which is expected to show that about 187,000 new jobs were created and that the unemployment rate remains at 4.1%. October factory orders are expected to decline slightly and be less than the previous month due to softness in civilian aircraft orders. The ISM non-manufacturing or services sector index should approximate the October number and indicate continued strong expansion.

If Congress fails to pass a bill that funds the government, there will be a partial government shutdown beginning on Friday.

The most notable companies that are scheduled to report earnings this week include Dollar General, Costco Wholesale, Bob Evans Farms, AutoZone, Toll Brothers, H&R Block and Broadcom.

Portfolio Strategy

News on Friday that former National Security Advisor Michael Flynn pleaded guilty to the FBI and was prepared to cooperate with the the special counsel regarding the Russian investigation was enough to send the stock market tumbling. From peak to trough, the Dow Jones Industrial Average quickly sank about 400 points while the S&P 500 lost almost 2%. By the end of the trading day, though, stocks rallied and the Dow closed down only about 40 points on the day. The stock market does seem long overdue for a correction as the S&P 500 has now set a record for the longest streak without as much as a 3% correction. But the month of December has historically been a strong one for stocks. Since 1950, the S&P 500 has been up 75% of the time in December with an average gain of about 1.5%, making it the best month of the year for stocks. There is no reason to believe that this December will be any different, either. Although the political drama in Washington and the prospects of a government shutdown will likely cause some near-term volatility, they will probably not derail the bull market in stocks. The fundamentals of the U.S. economy are too solid for there to be a prolonged slump in stocks. If the month of December is positive for the stock market again, it will mark the first time ever that all 12 months of the year have been positive on a total return basis. With Christmas just around the corner, betting against a Santa Claus rally could be hazardous to your portfolio.