The stock market bulls continue to be in full control as we move into the final month of the year. Only the small-cap stocks are threatening to finish the year in the red should a “Santa Claus” rally fail to emerge over the next few weeks.
With QE3 gone and higher interest rates looming on the horizon in 2015, the stock market is looking for direction from retail sales during the next few weeks and the jobs reading this coming Friday.
While major retailers, such as Wal-Mart Stores Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT), offered some positive metrics on Black Friday, the National Retail Federation (NRF) was not as positive. It suggested retail spending fell 11% on the weekend due to low store visits. While it’s not clear how valid these estimates are, the NRF also predicted strong sales in November and December.
Without help from the consumer, the stock market could pause and be vulnerable to downside moves.
What gives me some optimism, however, is the continued growth in the jobs numbers; the economy has managed to generate more than 200,000 new jobs monthly for the majority of 2014. On Friday, when the U.S. Department of Labor reports, consensus is calling for the creation of 225,000 new jobs, versus 214,000 in October. Yet what’s important is that the unemployment rate is expected to hold at a multi-year low of 5.8%.
Add in the growing confidence in the jobs market with continued higher home prices and wealth, and you have the raw materials to drive consumer spending, gross domestic product (GDP) growth, and the stock market. My only concern is that homeowners are beginning to increasingly use home equity for expenditures. The risk here is that as interest rates rise in 2015, the carrying costs will also increase.
Another major risk factor as we move forward will continue to be the stalling in China and the eurozone. Manufacturing metrics from both regions are showing some stalling. Moreover, the eurozone’s most influential and largest member, Germany, is seeing some slowing.
Why I’m concerned with the slowing in the global economy is because it will be a drag on the domestic economic renewal and, ultimately, the U.S. stock markets. (We have to remember that many U.S. companies get their sales from abroad, so a slowing global economy means slowing sales for these businesses.)
On the charts, the technology group was tops in November, with the NASDAQ edging up 3.49%. The NASDAQ is inching closer to the 5,000 level, which likely could be taken out sometime in the first half of 2015—or sooner.
Small-caps struggled with a 0.01% decline following their 6.49% advance in October. Should the economy lag, small companies will also.
Finally, blue chips have been strong, with the DOW looking at taking out 18,000 in the near-term if the buying sentiment holds, perhaps even moving towards 20,000 next year.
An area that I do not like at this time, despite its distressed price, is oil. West Texas Intermediate (WTI) oil continues to be weak after prices fell below $70.00 to $65.00 per barrel. The lower energy costs add more money for the consumer, while also aiding the transportation companies, such as the airlines, trucking companies, and couriers. I suspect we could see a $60.00 bottom for oil prices, so investors could look at that as a potential entry.
As far as the stock market goes, the most prudent thing for investors to do at this time is to continue to ride the gains—but also take some money off the table. And, of course, use put options to hedge against downside risk.
This article is brought to you courtesy of George Leong.