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Nasdaq tops 9,000 and S&P 500, Dow close at all-time highs

People who thought there was a bubble, and that prices were too high, find themselves questioning their own earlier judgements, and start to wonder whether fundamentals are indeed driving the price increase. – Robert J. Shiller

In the holiday-shortened week, the stock market continued its climb higher into rarefied air as the Dow Jones Industrial Average and the S&P 500 Index closed at all-time highs and the Nasdaq Composite Index topped 9,000 for the first time ever and ended the week near a record high. The S&P 500 had notched its 34th record close in 2019 by the time the closing bell sounded on Friday. There was a dearth of economic data and corporate earnings reports last week but that didn’t seem to matter as investors were basking in the afterglow of a Phase One trade deal with China and enjoying the anticipated Santa Claus rally which has not disappointed. President Trump announced that there would be a formal signing ceremony in January with Chinese leader Xi Jinping and there was other good news from the world’s second largest economy. Data showed that profits at China’s industrial firms grew at the fastest pace in eight months in November. China also announced that it will cut import tariffs on over 850 products as it tries to boost imports in the midst of a slowing economy and a trade war with the U.S. In this country, holiday retail sales data was released last week and it showed that consumers were definitely in the mood to spend. Mastercard indicated that total U.S. retail sales for the period November 1st through Christmas Eve rose 3.4% from a year earlier. The final Saturday before Christmas, known by retailers as Super Saturday, registered $34.4 billion in sales, setting a record for the biggest single day in U.S. retail history. While the path of least resistance for the market has been higher, trading volumes have been light, making it difficult to assess whether this rally has legs. The fear of missing out on a strong year-end rally has caused investors to invest in stocks with no concern for valuation, fueling additional gains in the market. With the stock market overbought, the end of another holiday-shortened week and the Santa Claus rally period on January 3rd could lead to some profit-taking in coming weeks.

Last Week

U.S. durable goods orders in November recorded their biggest decline since May as orders for defense aircraft and parts plunged. Factoring out defense orders, durable goods orders were up slightly but still were less than expected. New home sales in November were also slightly less than forecast while weekly jobless claims fell by 13,000 to 222,000 as the labor market remains strong.

For the week, the Dow Jones Industrial Average added 0.7% to close at 28,645 while the S&P 500 Index rose 0.6% to close at 3,240. The Nasdaq Composite Index gained 0.9% to close at 9,006.

This Week

Both the Institute for Supply Management Chicago Purchasing Managers’ Index (PMI) and the Manufacturing PMI are forecast to be below 50 for the fourth and fifth consecutive months, respectively, a worrisome sign that indicates continued contraction. The Consumer Confidence Index for December is expected to post a strong reading after posting a four-month decline.

The Federal Open Market Committee (FOMC) releases minutes from its monetary policy meeting in December. The markets are closed on New Year’s Day.

For the second week in a row, there are no notable quarterly corporate earnings reports scheduled to be released.

Portfolio Strategy

As we enter the final week of the year, this could be the stock market’s best calendar year in more than two decades. The S&P 500 Index has been positive for five consecutive weeks and is up nearly 9% in the fourth quarter. Through the close of business on Friday, the S&P 500 has posted a total return of 31.8% and the gains have been broad-based with every sector of the S&P 500 up at least 20%. The only sector with disappointing returns has been the energy sector with gains of about 9%. However, much of the good news has already been priced into the market and stocks may be borrowing from potential returns in 2020. The market has factored in a partial trade agreement with China as Phase One of the deal is slated to be signed in January. The Federal Reserve has also signaled that it is neutral with regard to monetary policy and is unlikely to raise interest rates in 2020. The consumer remains strong as evidenced by record holiday sales figures and the odds of a recession next year are very low as consumer spending accounts for two-thirds of economic activity. There are also signs that global growth may have bottomed and that economies worldwide may begin to improve. With the S&P 500 now trading at roughly 19 times forward earnings, the market appears fully priced with very little margin for error. Sentiment indicators have become decidedly more bullish and there seems to be complacency setting in among investors. With this in mind, the best thing for the market now would be to consolidate recent gains and take a breather from its historic run.