Dollars and Sense: Merry Christmas forecasted for Wall Street

Taking a breather. The financial news this week has been at least OK—you might even say good. The markets have lagged a bit; in the past week, they were down about 2 percent. But that’s not a crash, or even a correction—it’s well within normal variation. You could say the markets took a bit of a breather this week.

Good news is bad news. The markets fell slightly even though the government released data saying the third quarter gross domestic product improved, and new jobless claims fell below 300,000. Those good-news reports contributed to sentiments that the Federal Reserve would begin to reduce its stimulus program sooner than speculated. It’s another example of what we’ve been talking about ever since the Fed’s stimulus program began: Good news in the economy is often bad news for the markets because it means the Fed might end its stimulus. Another indicator pointing toward an end to the Fed’s bond-buying binge was the yield on the 10-year treasury note, which climbed to 2.85 percent. Some folks worry about inflation if the Fed’s bond buying continues much longer. Adding to those fears: The value of the dollar declined against the currencies of major U.S. trading partners.

Drilling down. I’ve been hearing that the 3.6 percent growth in the GDP is not all it’s cracked up to be, either. If you drill down beyond that top number, you discover that a lot of the economic activity went into producing goods that didn’t actually sell but went into inventory. Of course, that wouldn’t be a problem if retail sales were also growing. All the extra inventory just gets bought, and the growth continues. Brick-and-mortar retailers lagged this week. Sears, Target, and J.C. Penney were all down a percent or more on Monday after the sales data started coming out.

Jobs picture brightens. That said, on Thursday we got news that new claims for jobless benefits fell below 300,000 last week. That’s a significant milestone. On Friday, we got another report that the economy produced more than 200,000 jobs last month, and the unemployment rate dropped to a five-year low of 7 percent. That was good enough news to send the markets up today, even if the gains are muted because of the good-news, bad-news effect of the Fed’s possible tapering of its bond-buying program.

The Week Ahead. It’s going to be a pretty quiet week in terms of economic reports. But though they are few in number, a couple of them are pretty important. We’ll get wholesale inventory numbers today. Normally, that report is a real snoozer. But because of what we said earlier about inventories, analysts are going to be looking at that number a bit more closely to see if inventories are stockpiling or moving. We will get retail sales numbers on Thursday. That number always moves the markets, and this month it will likely have an even greater impact.

A Strong Year-End? Despite the breather the markets are taking this week, most analysts predict nothing will happen to dampen what has been a remarkable year on Wall Street. The S&P 500, for example, has risen 26 percent this year. Historically, the S&P 500 posts its strongest monthly return in December, rising an average of 1.9 percent. Overseas markets often do even better. London’s Financial Times 100, for example, has averaged a December rise of 2.5 percent. The beginning of the month has been down a bit, but we’re so far up for the year that traders could be taking their profits and riding out the month. That could affect the month of December, but it’s still likely Wall Street is going to have a very merry Christmas.