Humbug! ‘Twas the week before Christmas and all was not calm, tensions were high, and then came the bomb. The Fed said “two more” and that made traders sore. And then from the hill came a clash over a wall, leaving markets no choice but to selloff and fall! Markets sold off again on Friday as traders were still making sense of the Fed guidance combined with a new fear of a government shutdown. Markets didn’t stand a chance on Friday, which would typically be a lower volume session. That was not the case as share volume was the highest it has been in 7 years. That tells us something about what might be going on. Traders typically make tax trades in December carefully selecting which profits to take while simultaneously liquidating losing positions seeking to harvest tax losses to offset profits. Both involve selling and in a normal year they can be offset with buying. So if an investor has a loss in a position, they would sell it and bank a tax loss which can offset any capital gains received during the year, thus lowering their tax bill. During normal market conditions, an investor would reinvest their proceeds in another similar investment in order to remain exposed to the market. Portfolio managers perform similar maneuvers on a larger scale. In a market such as the one we have been experiencing recently, many traders and portfolio managers are selling to take tax losses but most likely reserving cash to redeploy in the new year. This would effectively cause selling to intensify and would account for the larger volume we have been experiencing. On Friday the S&P500 fell by -2.06%, the Dow Jones Industrial Average slipped by -1.82%, the Russell slipped by -2.56%, and the NASDAQ 100 sold off by -3.15% led by the FANGs. Last week was the worst week for stocks since 2008 leaving stocks in a vulnerable position. The same can be said for traders egos and sentiment. That brings me to another topic which I have been underscoring a lot lately: sentiment. The markets are driven by sentiment and it is clear that investors and traders have recently been approaching the markets with increasingly negative sentiment. The good news in all this is that the economy seems to be quite healthy according to many sources, the least of which is the Federal Reserve. One large potential risk to the economy in coming months is a different type of sentiment: consumer sentiment. Consumers drive the economy making up the largest source contributor to GDP at ~67%. So goes the consumer, so goes the economy. While the holiday shopping season has been strong, many consumers have yet to open up what I would refer to as the butcher’s bill. That refers to all of the credit card bills that will show up in January. In January, many folks will also open their brokerage statements as well. With losses racking up from this past abysmal quarter and big credit card bills from holiday shopping, consumers may consider tightening their belts which can have a negative impact on the economy going forward! Later this week we will get the Conference Board’s Consumer Confidence indicator, which just in September reached highs not seen since 2000. Consumer Confidence is expected to be at 133.6 down from last month’s 135.7. This number must be very closely watched going forward.
Today, we will get Chicago Fed’s National Activity Index, which is expected to come in a 0.2 versus last months 0.24. The indicator is typically not a major indicator but with tensions high anything can trigger emotional trading. Today, stock markets will close at 1:00 PM Eastern and bond markets will close at 2:00. While volume is typically light on Christmas Eve day, there is no telling with recent activity what to expect in the session ahead. WHILE YOU WRAPPED GIFTS, Treasury Secretary Steve Mnuchin called the CEO’s of all the major banks to discuss liquidity. He decided to tweet about it saying that liquidity is good. While his intention may be to calm markets, it could have the opposite effect leaving many people wondering: is liquidity a problem? Have a wonderful holiday and please call me if you have any questions.