Dollars and Sense: Gas prices and Santa bring holiday cheer to Wall Street

Santa Claus rally? December is historically a good month for the stock market. During the past 50 years, the Dow has climbed in December an average of 1.6 percent. December has been a up month 69 percent of the time. This year, we’re in a slow but steady recovery, giving markets an extra boost, and strong third-quarter earnings seem to be supporting the current near-record stock levels. But it’s important not to get cocky. The Dow hasn’t seen a 10 percent correction in more than three years. That’s more than twice as long as the amount of time between corrections during a bull-market run, causing many analysts to say the market is overdue for a drop.

Gas price drop continues. Gas and oil prices are among the factors that will determine whether the rally continues. If prices at the pump remain low, that could keep consumers in their current buying mood. Consumer spending, in turn, fuels the rest of the economy. Patty Edwards, senior investment strategist at U.S. Bank Wealth Management, told USA Today, “Longer-term, the market will trade on earnings—which we view as still positive—more than emotion. But as long as the consumer remains in a good mood, it would appear to us that Santa Claus is indeed coming to town.” Conventional wisdom says for every $10 drop in the price of a barrel of oil, gross domestic product picks up 20 to 50 basis points, or two-tenths to a half percent. Oil prices are now below $70 per barrel, falling from a high of $100 per barrel just a few months ago.

Economic news. Gas prices aren’t the only reason stocks continue to rise. The economic news has been trending positive for months. For example, last week we learned services firms expanded at a faster pace in November. The Institute for Supply Management said its services index rose to 59.3 last month, up from 57.1 in October. Any number above 50 represents growth in the sector, and the higher the number, the faster the growth. Also late last week we learned the U.S. trade deficit fell slightly in October as exports rebounded while oil imports fell to the lowest level in five years.

Job creation continues. We also learned employers added 321,000 jobs in November—the largest one-month gain in more than two years, the Labor Department reported. Those numbers—which kept the jobless rate steady at 5.8 percent—far exceeded most economists’ expectations.

The week ahead. It will be a fairly light week for economic reports, but we will get one of the heavyweights for the month: retail sales, due out on Thursday. This report will be for November sales. Since the Christmas season is getting longer and longer, lots of holiday buying has moved into November, so analysts will attempt to parse this report as a proxy for the buying season. Also out this week, the producer price index (PPI), due on Friday. This report gives us a look at wholesale prices. It is not the best indicator of inflation, but analysts are looking for both warnings and reassurances that inflation is not on its way, so even the PPI is fair game for speculation.