Stock Market Rally Continues as the Economy Keeps Improving

Stock Market Rally Continues as the Economy Keeps Improving

Stocks began December on a strong foot as the economy improved and worries about global trade eased

The S&P 500 rose 0.2 percent between Friday, November 29, and Friday, December 6. It was the eighth positive week in the last nine.

However it didn’t start that way. Stocks initially dropped after manufacturing data missed estimates and President Trump suggested he might not strike a trade deal with China. But then the S&P 500 held some key levels and the news began to improve.

First, initial jobless claims plunged more than expected to a new seven-month low. That was positive because fewer Americans needed unemployment benefits.

S&P 500, daily chart, with 30-day moving average and key levels marked.
S&P 500, daily chart, with 30-day moving average and key levels marked.

Then on Friday, the government’s big payroll report crushed estimates as virtually every sector added workers. Previous months were revised higher and unemployment declined.

Consumer sentiment later in the morning also blew past the forecasts — just in time for the holidays. China even lifted tariffs on U.S. pork and soybeans, keeping hope alive for better relations between the world’s two largest economies.

GDP at 2%?

Not long ago, economists worried that slower business investment would cause the economy to grind to a near-halt. But the recent string of positives dispelled those fears and drove projections sharply higher.

Just consider the Atlanta Federal Reserve’s GDPNow running estimate for gross domestic product. Back in mid-November it was at just 0.3 percent, but now stands at 2 percent.

Atlanta Fed's GDPNow running estimate of economic growth. Green line shows recent improvement.
Atlanta Fed’s GDPNow running estimate of economic growth. Green line shows recent improvement.

There was also an OPEC meeting last week. Oil producers including Saudi Arabia and Russia agreed to remove an additional 500,000 barrels of supply from the market. That helped push black gold to its highest level in almost three months and made energy the best-performing sector overall. Will this lagging corner of the stock market finally come to life?

Health-care continued its breakout as sentiment toward the industry kept improving. Global and emerging-markets outperformed. Solar stocks, big leaders earlier in the year, also showed signs of turning higher again.

Ulta’s Beautiful Margins

At the individual company level, Ulta Salon (ULTA) had the biggest rally in the S&P 500. The beauty company surged 12 percent after customers paid top-dollar for high-margin cosmetics, resulting in strong quarterly profit.

Diamondback Energy (FANG), Marathon Oil (MRO) and Halliburton (HAL) followed with gains of 8 percent, 7 percent and 6 percent, respectively.

Another energy company had the biggest drop in the index. Apache (APA) crashed 10 percent after failing to provide positive news about a big project off the coast of Suriname.

Last week’s gain brought the S&P 500 back within 8 points of its all-time high. The Nasdaq-100 and Dow Jones Industrial Average are positioned similarly. Meanwhile the Russell 2000 small-cap index, S&P Midcap 400, Transports and global benchmarks have yet to break out.

The current setup is likely to keep investors debating between “growth” and “value”. What to do? Stick with flashy large, well-known companies? Or, hunt for bargains in lagging parts of the market? Either way, the current setup with steady economic expansion and low inflation makes it hard for savers to avoid equities.

Crude oil futures (@CL) with 200-day moving average.
Crude oil futures (@CL) with 200-day moving average.

Here Comes the Fed

This week brings a Federal Reserve meeting and a handful of other events. China will also be in focus with over $150 billion of U.S. tariffs scheduled to take effect on Sunday, December 15. Investors will be hoping for the White House to delay them.

Nothing’s scheduled for today or tomorrow. Wednesday morning brings oil inventories and the Fed issues its monetary statement in the afternoon. Interest-rate futures predict almost zero chance of officials making any changes. Chairman Jerome Powell will hold a press conference as well.

Initial jobless claims and producer prices follow Thursday morning. Adobe Systems (ADBE), Broadcom (AVGO) and Costco (COST) report quarterly results in the afternoon.

Retail sales are the final item on Friday morning.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.