Why We Could See Some Tough Sledding Ahead for Wall Street

Half-day today. Tis' the season. Tis' the start of the traditional "Santa Claus rally" period. Rock & roll. Stocks got off to a sleepy start on Monday, but both activity and sentiment picked up later on in the session, as traders and investors reacted to what was seen as some week looking macro. Perhaps some traders tried to get ahead of Santa's annual visit. The traditional period for what we refer to as the Santa Claus rally -- for those who do not regularly read my stuff or might be new to this sport altogether -- encompasses the final five trading days of the outgoing year and the first two trading sessions of the incoming year. That means the period, which typically runs positive a little more than 75% of the time and on average over the past few decades, has added about 1.5% to the S&P 500, begins today and ends a week from this Friday.

On Monday, coming after a strong trading session on Friday, but a weak week for stocks, the major U.S. equity indexes did well, while small-cap stocks struggled yet again. Much of the data released on Monday, I had scheduled for Tuesday, so either these were "surprise" releases, or I need new macroeconomic data release services, because I use two, and they both had November new home sales and November durable goods orders set for today. New home sales printed in line with expectations at 664,000 at a seasonally adjusted annual rate for November, but the durable goods data was weak at the headline.

Durable goods orders printed at an ugly -1.1% month over month for November. This was the third month in four that durable goods orders printed in a state of monthly contraction and a fourth month in six. Ex-transportation orders printed at -0.1%, and ex-defense orders hit the tape at -0.3%. Both were worse than anticipated. But core capital goods orders, which are ex-transportation and ex-defense, so a proxy for business investment, actually beat Wall Street at 0.7% m/m. That's at least an under the covers type of positive.

What really helped equities warm up as the day wore on was the disappointing December print for consumer confidence released by the Conference Board. That survey printed at 104.7, down sharply from 112.8 for November, and well below the 113 that Wall Street had been looking for. Because good is bad and bad is good on Wall Street, while this is not a positive for the economy moving forward, it does pave the way for potentially easier monetary policy in 2025. Hence, equity markets reacted well.

Marketplace

While the U.S. Dollar Index held its currently lofty levels on Monday and Treasury yields popped mildly, the S&P 500 was able to tack on 0.73%, while the Nasdaq Composite gained 0.98%, supported by tech. The strength in tech was propped up itself by strength across the semiconductor space as the Dow Jones U.S. Software Index printed down on the day. The semis were led by GlobalFoundries GFS, Broadcom AVGO and Taiwan Semiconductor TSM. Those three names were up 5.54%, 5.52%, and 5.15% respectively. As a matter of fact, Broadcom and Advanced Micro Devices AMD were the top two performers for the day in the S&P 500. The Russell 2000 and the S&P 600, both small cap focused indices, both closed in the red on Monday.

Both Technology XLK and Health Care XLV led the 11 S&P sector SPDR ETFs for the day, gaining more than 1%, as Consumer Staples XLP finished the day in last place, down more than half of one percent. Winners beat losers by just a smidgen at the NYSE, but advancing volume took a 57.1% share across composite NYSE-listed trade. Losers actually beat winners by a 7-to-6 margin at the Nasdaq, but here too, advancing volume took a 64.1% share of composite Nasdaq-listed activity. So, really thanks to the small caps, breadth was mixed yet again. Coming off of the triple witching expirations event on Friday and headed into a holiday shortened week, aggregate trade contracted sharply. Trading volume will likely be thin all week.

Tough Sledding Ahead?

Going into 2025, one would have to think that if the U.S. dollar continued to rise in value against its reserve currency peers and as Treasury yields remain at or rise from these levels that this would be a positive as far as containing consumer-level inflation is concerned, but maybe not so much for equities. As borrowing costs remain stubbornly elevated, debt service will crowd out any fiscal flexibility the incoming Trump administration had, though they might have, as well as slow down corporate access to funding and the ability to grow businesses. This could very possibly pare down forward looking multiples. Just food for thought for now, but we could very well learn something the hard way as we head into the second half of January into February. After the January Effect is felt is often when the "ugly stick" makes an appearance on Wall Street, if it's going to.

Of Course, the Fed Does Have a Say...

On Dec. 18th, last week, Thomas Barkin of Richmond, Rafael Bostic of Atlanta, Mary Daly of San Francisco, and Beth Hammack of Cleveland, all of the Federal Open Market Committee, voted on policy for the final time of the year and will now lose voting rights for at least a year as part of the committee's normal rotation. While Daly is seen as something of a dove, Beth Hammack dissented at the last meeting in favor of no hike, so one might guess her to be something of a hawk as was her predecessor, Loretta Mester. Both Barkin and Bostic have shown dovish tendencies in the past but have also proven themselves to be pragmatists in their public appearances.

Taking a look at those rotating into voting positions for 2025, we'll try to ascertain where this next version of the FOMC might be on policy. St. Louis Fed Pres, Alberto Musalem and Kansas City's Jeffrey Schmid will be voting for the first time in Late January. Both Musalem  and Schmid have expressed concerns over inflation in recent public appearances and both have shown a preference for taking a cautious approach toward the easing of monetary policy. There is a good chance that both of these new regional presidents may behave hawkishly when voting. Boston Fed Pres. Susan Collins will rotate back into a voting seat at the commit table for the first time since 2022. Collins has been leaning dovish in her recent public appearances, so while at times sounding quite pragmatic, I think I would tend to mark her down as more dovish than not.

Lastly, Chicago Fed Pres. Austan Goolsbee will return to a voting position at the FOMC and is considered to be something of a perma-dove on policy. My guess is we'll find out soon if he is willing to take a stand against inflation, if the early part of 2025 shows that to be a more prudent path for policy. 

Message to Readers

Merry Christmas to all who celebrate. Happy first night of Chanukah to all who observe. May the rest of you have a nice half-day today and a pleasant day off tomorrow. I wish the best and some real quality time with family and friends for all of you.

I happen to be Irish Catholic, and my wife is Polish, so we both come from strong, faithful Christian religious traditions. We celebrate Christmas. If you do not, you might want to make a U-turn here. That said, there is a short passage from the Christmas carol "O Holy Night" that brings me to the edge of emotion whenever I hear it or try to sing it. If you celebrate Christmas or are still with me at this point for entertainment purposes, please indulge me...

Fall on your knees,

O hear the Angel voices!

O night divine!

O night when Christ was born

O night divine!

O night, O night divine!

-- Cappeau, Adam (1847)

Economics (All Times Eastern)

08:55 - Redbook (Weekly): Last 4.8% y/y.

10:00 - Richmond Fed Manufacturing Index (Dec): Expecting -10, Last -14.

4:30 - API Oil Inventories (Weekly): Last -4.7MM.

The Fed (All Times Eastern)

No public appearances scheduled.

Today's Earnings Highlights (Consensus EPS Expectations)

No significant quarterly earnings scheduled.

At the time of publication, Guilfoyle was long AMD equity.