Santa Claus rally appears to come early to Wall Street

The bullish momentum that has driven equities higher over the last few weeks is beginning to slow down. That does not mean this bull run is over. It is just catching its breath.

The gains registered by stocks have been breathtaking. The S&P 500 Index has won back all its losses since October. It rose more than 8% heading into Thanksgiving.

Normally, this kind of action would have been reserved for the latter part of December during the yearly “Santa Claus Rally,” which occurs from mid-December into January of the following year. The moves higher have been bolstered by a lot of positive news this month.

Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in cooler than expected in October, which was contrary to economists’ expectations. Only 7 of the 31 core components of the CPI registered inflation. The used car and housing components are the most important indicators to me. Those two carry a lot of weight in the index. The downsize inflation surprise supports the bulls’ case that the Fed’ actions to beat down inflation are making headway. But there was more good news as well.

In mid-November, the credit agency, Moody’s Investors Service, lowered its outlook on the U.S. government debt to negative from stable. It cited the cost of rising interest rates and political polarization in Congress. Readers may recall my column of a few weeks ago in which I worried that Moody’s might follow credit agencies, Fitch and Standard and Poor’s in reducing the country’s AAA rating. Fortunately, the agency maintained its rating despite the negative outlook.

While not good news, it was better than many, including myself, had feared. One wonders if Moody’s negative outlook might have helped break the political shutdown logjam in Washington since Nov. 14 saw the surprise passage of another continuing resolution by both the House and the Senate. The strong bipartisan vote averts a government shutdown until next year.

That will hopefully give the politicians time to pass the 12 appropriations bills needed under regular order. This removed yet another concern for investors.

On the macroeconomic front, the weekly jobless claims, another closely watched indicator, rose to a three-month high. U.S. industrial output fell the most in 4 months and U.S. manufacturing declined another 0.7% from a month earlier, which was more than the 0.3% decline expected. While all this data is bad news for the economy, the financial markets liked what they heard. It indicates that the economy is slowing, which should put the Fed on hold as far as future monetary tightening.

Bill Schmick is a founding partner of Onota Partners Inc. in the Berkshires. None of his commentary is or should be considered investment advice.  Email him at bill@-schmicksretiredinvestor.com.