Stock Market Rally Should Continue Into January

The stock market's rally should continue at least into early January.  The market will likely continue to ignore new virus cases and consequential deaths as well as soft US economic data now that two vaccines have been approved and are being given to the public.  The bad news is viewed as temporary.  While the fiscal stimulus bill will provide a modest boost to the economy, its passage means the possibility of its absence is no longer hanging over the market.  The most important hurdle for the market now is the Georgia run-off Senate elections on January 5.  This is far enough ahead to allow for a further rally until then.  

The drag from the renewed shutdowns appear to have shown up in the 1.1% m/m decline in November Retail Sales and the increase in Initial Unemployment Claims.  But, their import may be less than meets the eye.  Indeed, the Atlanta Fed model's estimate of Q420 Real GDP Growth was cut only slightly to a still huge 11.1% (q/q, saar) from 11.2%.

Some of the Retail Sales weakness could have resulted from price discounting.  Also, a decline in Retail Sales is not unusual after a surge in the prior month, as was the case in October.  Such "consolidation" in sales could last a few months.  It's noteworthy that car companies were not discouraged by the decline in sales last month.   The November Industrial Production Report shows a bounce in Motor Vehicle Assemblies to an above-trend level. 

The increase in Initial Claims likely reflects a resurgence of layoffs from the shutdowns.  Initial rose despite the potential for an unwinding of a post-holiday rebound.  This suggests that the increase in shutdown-related layoffs was even greater than the 24k increase in Initial Claims. In any case, it will be important to see if Continuing Claims rise in this week's Report and confirm the worsened labor market situation.  The prior week's decline in Continuing shows that re-hiring remained strong.

This week's US economic data are of minor significance for the market.  Some are expected to pull back from very strong prints in the prior month.  These include November Existing Home Sales and Consumer Spending.  But, others, like November Durable Goods Orders, are seen rising further.  It will be interesting to see if the December Conference Board Consumer Confidence Index confirms the increase in the University of Michigan Consumer Sentiment Index.  Although the Conference Board Index is known for its labor market components, the Claims data already point to a slowdown in December Payrolls (excluding census workers).