Market Subdued Ahead of Fed Announcement

Market Summary

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Year-to-date, most of the major asset classes are basically flat, but the graph below suggest a stellar fourth-quarter performance for the equity indexes. The market has basically decided that the Fed will moderately raise interest rates at the FOMC meeting in a few weeks and have priced that expectation into stock valuations. Keep in mind the reason this quarter’s performance appears so strong is that stock prices had bottomed out to start the quarter and the market recovery accentuated the quarterly gain. Note, that even after the strong bullish move from the market crash, the major indexes have yet to attain their highs for the year. The graph also confirms the FOMC rate increase expectation is depressing interest rate sensitive asset classes such as bonds and precious metals.

We are betting that most of the major indexes end the year marginally higher based on December being one of the strongest months for average performance and frequency of gains. After the melodrama over the FOMC increasing interest rates for the first time in a decade subsides in a few weeks, stocks are setup to finish strong going into year-end. If the Fed does as everyone expects and moderately raises rates, the removal of uncertainty should catapult stock prices higher. Remember that investors disdain uncertainty and that has been holding back stock prices. Investors are currently ignoring global geopolitical events and unless there is some unexpected major economic crisis, expect stocks to move back toward yearly highs before the end of the month.

Investment Analysis

The updated graph below supports the historical trend for the market’s fade after the thanksgiving holiday as money managers go through year-end sector rotation and tax selling. You can see that after a strong fourth-quarter start, all of the major S&P sectors have pulled back over the past month. The energy sector is the biggest loser and it is probably a good idea to bail out of these stocks until prices stabilize. We believe now is a good time to identify entry opportunities for stocks on your watch list. As recently discussed in the Almanac Trader, pre-election Decembers have been stronger than average with the S&P up 3.2% and NASDAQ up 4.9% in Decembers in the third year of the 4-year cycle. Also, December is usually up sharply in the seventh year of a two-term president’s reign and after a strong October performance like we had this year.

In the weekly S&P 500 Index weekly chart below the green rectangle highlights the fall 2014 market crash and year-end price recovery. We are betting on similar behavior this year. You can see in the chart how this fall’s chart pattern is eerily similar to last year. Stocks began the fourth-quarter in a swoon, but have been trending higher after bottoming out in September. Investors are showing solid gains for the quarter and appear to be cashing in profits by selling into strength (which helps explains the recent triple-digit daily price moves). As evidenced in the chart below, the recent rally will probably soften over the next few weeks until the Fed announces its interest rate decision on December 16th and tax-loss selling starts slowing down. Similar to last year, the stock market is setting up for a strong year-end move as traders perform sector rotation and balance sheet “window dressing”.

By Gregory Clay

Investment Strategist

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