It’s the most wonderful time of the year, or so the song goes. And while those who hate the snow might disagree, for the stock market, December really can be wonderful.

For a moment there, though, it didn’t feel that way. The Standard & Poor’s 500 index started the week where it had left off the previous one—with a small decline—and just kept on dipping. By Wednesday, it had dropped four days in a row. But as Nomura Instinet technical analyst Frank Cappelleri noted, the benchmark hadn’t dropped for five or more days in a row since November 2016, and it wasn’t about to suffer one now. The market rallied for the rest of the week.

All told, the S&P 500 advanced 0.4% to 2651.50 last week, an all-time high, while the Dow Jones Industrial Average rose 97.57 points, or 0.4%, to 24,329.16, also a record. The Nasdaq Composite finished down, but only just: It declined 0.1%, to 6840.08.

If I were a betting man, I’d place my wager on more gains from here. During the past 20 years, just five Decembers have finished in negative territory, for an average loss of 1.8%, a number exacerbated by a 6% tumble in 2002. The rest of the time, December has delivered gains—often quite good ones: The average December rise has been 2.6%.

Enjoy This Market While It Lasts

The odds of a big spike in volatility are even lower. Nicholas Colas, co-founder of DataTrek Research, notes that since 1990, the CBOE Volatility Index, or VIX, has tended to peak in January, August, or October, while its troughs have occurred most often in July or December. This year, the VIX hit its low of 9.1 in November, a month that has rarely marked the bottom for the measure. The upshot: “Markets are much more likely to resemble Santa than Scrooge during the holiday season,” Colas says. For the record, the VIX closed at 9.58 on Friday.

There’s not much to scare the market between now and year end. Congress has extended the budget deadline until Dec. 22, avoiding a government shutdown, and if they can do it once, they can probably do it again. Tax reform is making progress, and there’s even a chance that a bill reaches President Donald Trump’s desk for signing by Christmas. And it’s not as if the market needs tax reform to keep chugging along. As we saw on Friday, U.S. payrolls are still growing at a healthy clip—the economy added 228,000 new jobs in November—while the unemployment rate remained at 4.1%.

MKM Partners strategist Michael Darda calls it the best-case scenario for markets. “Growth momentum remains above recovery averages, but not so fast as to create an inflation panic at the Fed,” he explains. “Enjoy it while it lasts.”

(Source: Barrons Online)

It was the melt-up that wasn’t. And that’s probably good news for investors.

Last week, the major indexes were well on their way to new highs—the Dow Jones Industrial Average had gained more than 700 points through Thursday’s close—thanks to solid Thanksgiving shopping reports from retailers and progress on tax reform.

Headlines hit the newswires reporting that Michael Flynn, a former advisor to President Donald Trump, had agreed to plead guilty and testify, causing the Dow to shed 400 points from peak to trough in a matter of minutes. The drop happened so quickly that some opined that humans couldn’t have been responsible for the tumble. “No way real traders were moving that fast,” says Andrew Brenner, head of international fixed income securities at NatAlliance Securities. “Clearly, it was algorithms taking over.”

Not for long, however. The Dow rallied back and finished off just 40.76 points on Friday, ending the week, if not on a high note, then with a sigh of relief. The Dow industrials gained 673.60 points, or 2.9%, to close at 24,231.59—their largest weekly gain since December 2016. The Standard & Poor’s 500 index rose 1.5%, to 2642.22. Only the Nasdaq Composite finished lower: It dropped 0.6%, to 6847.59.

Yes, the Nasdaq, home to some of the year’s best-performing stocks, finished down on the week, as clear a sign of a market rotation as we’re likely to see. The seven top-performing stocks, including L Brands (ticker: LB) and Discovery Communications (DISCA), had all suffered double-digit declines this year, while the nine worst-performing stocks, including Micron Technology (MU) and Nvidia (NVDA), all had double-digit gains. That rotation might have exacerbated Friday’s selloff, says James Paulsen, chief investment strategist at the Leuthold Group. He contends that the move from one sector to another likely made the market more susceptible to some sort of surprise. “It could have been any news,” he explains. “If the rotation hadn’t been happening, it might not have mattered.”

But the rotation is happening. JPMorgan strategist Shawn Quigg attributes the shift from highflying growth stocks to beaten-down value plays to the increasing odds that tax reform will pass, as investors begin to shift money into the companies that will benefit if taxes are cut. If that’s the case, investors have two choices—either to put new money into what had been the market’s laggards, in which the former highfliers could lag but still rise with the market, or reduce their exposure to the former winners like Facebook (FB), Wynn Resorts (WYNN), and Netflix (NFLX) and put that cash to work elsewhere. Quigg leans toward the former, but notes that either way, investors should be more careful with their winners. “There’s some added risk into year-end,” Quigg says.

But Friday’s Flynn-inspired selloff that wasn’t can also be chalked up as just one more test for this bull market that began more than eight years ago. We’ve had selloffs related to Brexit, weakness in China’s yuan, and numerous others along the way. And yet the market keeps ticking higher. If you weren’t watching closely Friday, you might not have even noticed that anything exciting was happening.

It also pays to remember that politics doesn’t usually derail a bull market—it certainly didn’t during the Bill Clinton impeachment, says Krishna Memani, chief investment officer at OppenheimerFunds. And with the melt-up postponed, stocks are set to continue what has been a slow plod higher. “We’re in a good situation,” he adds. “We should fret less and enjoy it more.”

(Source: Barrons Online)