Santa Clause Rallies Don’t Happen As Often As They Used To

Stocks indexes were down slightly on Tuesday because of AAPL. Apple fell 2.54% because of reports of weak demand for the iPhone X. If the iPhone X sells badly, the company will shift its focus to lower priced products like the iPhone 8, hurting margins. It is questionable if Apple will continue to be able to ship phones with large bezels like the iPhone 8 and 8 Plus next year at high end price points. The firm may have bit off more than it can chew because most high end phones have bezelless displays. It has become a must have feature instead of an add-on feature which some consumers pay up for.

Even with AAPL’s sell-off, the S&P 500 was only down 0.11%. If you look at the chart below, this performance was normal for the last week of the year in this bull market. Since 2009, the stock market has only been up 25% in this week. Usually, stocks are up this time of year especially when the market is up 15% or more. One hypothesis I have for why this has changed is that the algorithmic trading functions don’t care about holidays. For most of the history of the market since 1945, this week is when young traders get a chance to shine while the experienced ones take off. Now, the computers running the show don’t take off during the holidays, so trading doesn’t have an upward bias.

This Cycle Will Probably Be The Longest Ever

This expansion is the 3rd longest since 1854. With early 2019 being the date when it is the longest expansion, it’s not a tough call to say this will be the longest expansion. This expansion has confounded many economists and investors because it’s tempting to think the economy can fall into a recession when it’s growing so slowly. With economic growth between 1.6% and 2.6% per year, it’s easy to see growth falling a bit and the economy having a recession. However, that’s the exact opposite of reality. Because growth and inflation have been so low, the Fed and the government are encouraged to provide monetary and fiscal stimulus which help prevent a recession. It has been a Goldilocks situation for stocks and those wanting to avoid recessions. According to the output gap and the yield curve, the economy has a couple more years before a recession. The key negative effect of this weak growth is low wage growth. As you can see, the latest data point from the Atlanta Fed wage tracker is bad news. The wage growth in November slowed from 3.4% to 3.2%. It has been in the 3-4% range for the past 1.5 years. It probably will push higher next year.