Will OPEC Decision Halt the Santa Claus Rally?

While you were enjoying your Thanksgiving meal, the 12 members of the Organization of the Petroleum Exporting Countries (OPEC) announced that the cartel would hold its output target at 30 million barrels per day. The decision caused a steep sell off in Brent crude oil (the global benchmark) on the ICE Futures Europe. When U.S. markets opened on Friday, investors dumped West Texas Intermediate crude on the New York Mercantile Exchange and futures plunged 10.2 percent to $66.15 a barrel, the lowest settlement since September 2009. Both oil benchmarks are experiencing their worst losing streaks since the financial crisis in 2008, with 18 percent losses for the month of November. As previously mentioned in this space (Peak Oil Pukes), sinking oil and gas prices should help consumers, but the savings has not yet created overall cheer. Last week, the Conference Board said that its consumer confidence index dropped to a four month low in November. But Capital Economics notes “this fall needs to be taken into context alongside the sharp rise earlier in the year.” In fact, confidence is still close to seven-year highs.

What has been driving confidence this year has been the steady improvement in the jobs situation. Through October, the economy has added 2.225 million private sector jobs and 2.285 million total jobs in 2014. The November jobs report, which is due this Friday, is expected to show that the economy added 220,000 jobs. If that happens, 2014 will be the best year for private employment since 1999, according to Calculated Risk.

The unemployment rate is expected to remain at 5.8 percent, which puts it close to the Federal Reserve’s estimate of the longer-term, normal rate of unemployment of 5.2 percent to 5.5 percent. But with wages still up only 2 percent year over year, the central bank is likely to keep interest rates at 0 to 0.25 percent until next year.

Despite lots of energy and attention, the initial reports from retailers about the big holiday weekend may tell us less about the economy than the jobs report. Analysis from the New York Times found that while the holiday season is important for retailers, it “matters only a little bit” for the overall economy. The reason is clear: consumers would spend a certain amount of money in any two months. When stripping out the normal expenditures, “for the last two months of the year, Americans are on track to spend $106 billion more than they would if these were any old months.” Not that you would sneeze at $106 billion, but compared to the $17.6 trillion US economy, it’s not nearly as important as the elusive 3 percent increase in wages that we have seen in previous expansions.

MARKETS: Will investors be treated to a “Santa Claus Rally”? The old Wall Street chestnut predicts stocks do well during the period just after Thanksgiving through the end of the year. Over the past five years, the S&P 500 has gained an average of 2.5 percent during December. But OPEC's decision to maintain current production levels could weigh on energy stock prices, curtail energy company profits and limit the near-term upside in markets.

• DJIA: 17,828, up 0.1% on week, up 2.5% on month, up 7.6% YTD
• S&P 500: 2067, up 0.2% on week, up 2.5% on month, up 11.9% YTD
• NASDAQ: 4791, up 1.7% on week, up 3.5% on month, up 14.7% YTD
• Russell 2000: 1173, up 0.01% on week, up 2% on month, up 0.8% YTD
• 10-Year Treasury yield: 2.17% (from 2.31% a week ago)
• January Crude Oil: $66.15, down 13.5% on the week, down 18% on month
• December Gold: $1175.50, down 1.8% on the week
• AAA Nat'l average price for gallon of regular Gas: $2.78 (from $3.28 a year ago)

 THE WEEK AHEAD:

Mon 12/1:

Cyber Monday

9:45 PMI Manufacturing

10:00 ISM Manufacturing

Tues 12/2:

Motor Vehicle Sales (2014 is on pace to be the best year since 2006)

10:00 Construction Spending

Weds 12/3:

8:15 ADP Private Sector Employment Report

8:30 Productivity

10:00 ISM Non Manufacturing

2:00 Fed Beige Book

Thurs 12/4:

8:30 Weekly Jobless Claims

Fri 12/5:

8:30 November Employment Report

10:00 Factory Orders

3:00 Consumer Credit