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Time for investors to worry about the 'January Effect'

Peter Kenny
Peter Kenny

By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of KennysCommentary.com

Themes:

  • Stronger-than-expected monthly employment gains and modest wage growth underpin November’s employment report
  • Non-farm payrolls beat consensus expectation (228k actual vs. 190k consensus)
  • Unemployment rate level at 4.1%, a 17-year low
  • Significant gains in manufacturing, construction and professional services
  • Average hourly earnings M/M tick higher by 0.2%, in line with Y/Y growth of 2.5%
  • FOMC meets this week for the final time this year
  • FOMC expected to raise rates by .25 bps this Wednesday and provide guidance for further tightening in 2018
  • Quadruple Witching this Friday
  • S&P price target implies a 6.5% rise in equities prices over the next 12 months
  • Alabama special Senate election Tuesday, GOP candidate Moore ahead in the polls

U.S. equity prices leveled off last week as the S&P 500 (^GSPC), Dow Industrials (^DJI) and Nasdaq Composite (^IXIC) all posted fractional losses during the week. As indicated in last week’s note, equity markets have largely factored in the near-term boost in prices that was derived from expectations for passage of the tax code legislation working its way through Washington. Though specific details in regards to the final bill remain somewhat unclear, the principles outlined in the versions that have passed the House and Senate appear to represent a potential boost to economic growth and corporate profitability in coming quarters. With passage of the legislation largely built into the equity market landscape, investors this week will shift focus.

Federal Reserve Chair Janet Yellen at FOMC press conference on September 20, 2017 in Washington, DC. (Source: Getty)

On Tuesday and Wednesday of this week, the FOMC will hold its last meeting of the year. On Wednesday, at the conclusion of the meeting, the FOMC will make its interest rate announcement and provide monetary policy guidance moving forward. Fed Chair Yellen will be holding a press conference at 2:30 p.m. Investors have been expecting a 25 bps bump in rates at this meeting, and they will not be disappointed. If there were any doubts about that last week, and in particular after the appointment of Jerome Powell to fill the Fed Chair in 2018, last Friday’s release of the November employment report should expel them.

The November employment report was very solid. Not only did the monthly gains in employment once again surpass consensus expectations by nearly 38k, the official unemployment rate remained at a 17-year low of 4.1%. Additionally and very importantly, out-sized gains in manufacturing and construction unpinned the report. Average hourly earnings rose 0.2% from the previous month’s revised 0.1%. The average work week ticked up to 34.5 hours from 34.4. The labor force participation rate remained steady at 62.7.

This Friday, we also have the last quadruple witching of 2017. Look for a degree of price volatility to re-enter the market late Wednesday and into Thursday. Friday we will see a spike in volume, and the question is: Where will the expiration leave prices at week’s end? Though I suspect we will see some lift in financials as a result of the FOMC move, we will otherwise have another largely flat price performance for equity markets — particularly now that earnings season is largely over. Additionally, I would not be at all surprised to see equity prices tick lower at week’s end.

Historically at this time of year and after the final quad witching, we begin to see manifestations of the “January Effect” — portfolio window dressing and portfolio re-positioning heading into the close of the calendar year. It precisely as a result of these themes that December has historically been one of the best months of the year for equity investors. However, this year, given the run-up in prices that we have witnessed heading into December and the stretched valuations that have resulted, that historical updraft that normally accompanies this time of year may well be muted.

Commentary by Sam Stovall, chief investment strategist at CFRA Research

CFRA’s Investment Policy Committee voted to establish its year-end 2018 price target for the S&P 500 at 2800, implying a 6.5% price appreciation over the December 5 closing value. The committee cited an expected 2.8% gain in U.S. Real GDP in the coming year, versus the 2.3% growth likely seen for 2017, combined with a modest anticipated y/y increase in core inflation to 2.1% by the fourth quarter of next year. In addition, while consensus estimates from S&P Global point to a near-11% y/y gain in S&P 500 operating EPS for all of 2018, we think the tax cut working its way through Congress remains supportive of equity ownership, but is not reflected in current Wall Street estimates, due to a lack of detail and certainty. Finally, the lack of attractive alternatives in this rate-tightening environment continues to favor equity ownership.

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WTI Crude Oil (Nymex) (CL=F) $57.78/bbl
Gold (Comex) (GC=F) $1,247.50/t. oz.
10-year Treasury Note yield (CBOE) (^TNX) 2.373%
Volatility S&P 500 (^VIX) 9.55
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Economic Calendar:

Tuesday

FOMC Meeting Begins

6:00 AM NFIB Small Business Optimism index

8:30 AM PPI-FD

Wednesday

MBA Applications

8:30 AM Consumer Price Index

10:30 AM EIA Petroleum Status Report

2:00 PM FOMC Meeting Announcement

2:00 PM FOMC Forecasts

2:30 PM Fed Chair Press Conference

Thursday

8:30 AM Weekly Jobless Claims

8:30 AM Retail Sales

8:30 AM Import and Export Prices

9:45 AM Bloomberg Consumer Comfort Index

10:00 AM Business Inventories

Friday

Quadruple Witching

8:30 AM Empire State Mfg. Survey

9:15 AM Industrial Production

10:00 AM Atlanta Fed Business Inflation Expectations

1:00 PM Baker-Hughes Rig Count