The schedule for data releases is lighter than usual. The calendar year is about to end. The market continues to set records. The stage is set for the annual question:

Will there be a Santa Claus rally in stocks?

Prior Theme Recap

In my last WTWA I predicted a three-part week – some post-holiday digestion of the news, a mid-week focus on the Fed, and a shift to the jobs story. That was pretty accurate, although the continuing decline in oil prices was a constant subject.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week's Theme

This is the time of year when the calendar seems to command extra attention. Having escaped the seasonal scare of October and with an eye to year-end price targets, the punditry considers the prospects for a year-end rally. The combination of the calendar, record market highs, and relatively light news brings this question to the fore:

Will there be a Santa Claus Rally in Stocks?

Here are the basic viewpoints:

Annual seasonal factors are strong. These include the year of the Presidential election cycle, years ending in “5” and similar historical factors. Myles Udland of BI has this story.

Monthly seasonals are supportive. (USA Today). This speaks to the information highlighted for average investors.

December is not that special. Mark Hulbert runs the numbers and compares to other periods.

Any effect will happen in the last few days. (Pension Partners)

Oil prices might rebound. Urban Carmel analyzes some correlations. (But see my final thoughts below).

A flattening yield curve and high yield spreads signal possible deflation.

Economic strength signals potential inflation, sparking faster Fed action.

I have some thoughts about Santa. More about that in today's conclusion. But first, let us do our regular update of the last week's news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week's Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

The news last week was very good, once again even better than stock prices suggested.

ISM surveys were strong. The ISM manufacturing survey came in at 58.7 and services at 59.3 ISM research shows that this level corresponds to economic growth of 5.1%. The comments were also strong. See the official source for a good description and a discussion of the internals, which show continuing growth but a mixed story in the rate of growth.

 

 

Declining oil prices – providing benefits to consumers and a long-term boost to stock prices. (NYT) (Also Washington Post). Last but not least, the Fed (via Reuters).

Investor sentiment has turned more negative (bullish on a contrarian basis). Bespoke has continuing helpful coverage of this subject. I also appreciate AAII's official coverage of this topic, which notes that optimism is still above the long-term average.

 

 

Chinese stocks get stronger. Josh Brown highlights the move in the ETFs featuring “A Shares” and also notes the implied economic strength for China. This seems counter to current trader expectations. Morgan Stanley agrees.

Employment gains are stronger. This is true whether you look at the number of jobs, the hours worked (gain equivalent to a 400K net job change) revisions, wages, or other elements of the survey of establishments. Here are two great sources:

• Barry Ritholtz is relentlessly focused on the long-term trend, ignoring the monthly deviations. Great advice!
• The WSJ has complete coverage and a balanced ten-chart pack.

 

 

 

Data spinners have plenty of opportunity on the employment report. One game is to cite whichever survey is weaker – household or establishment. Each has a wide error band and a different method. The conclusions often deviate in the short run. Eventually they converge. Those citing the household survey this month did not do so last month when it was strong. To keep perspective, here is a chart from Bob Dieli's excellent monthly employment report analysis:

 

 

 

 

The Bad
There was not very much bad news. There were some very small misses in the data, but nothing really important. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.