Forget Friday, the Rest of December Is Full of Landmines for the Stock Market

Stocks are near record highs, but the December rally remains muted. (NYSE)

Key Points

• The S&P 500 has seen muted gains, up 0.66% since pre-Thanksgiving and 0.9% over the past month, despite expectations for a December rally.
• Delayed economic data releases and an unusual schedule are complicating market analysis, with key reports like PCE inflation covering September.
• Treasury volatility is at a four-year low, and the VIX index is below 16 points, indicating dormant market volatility despite various uncertainties.

Wall Street is heading into the final trading stretch of the year with a host of questions that remain unanswered, many of which won’t be addressed by Friday’s delayed spending and inflation data, as stocks eye record highs and the traditional late December rally.

For a market expecting significant tailwinds heading into next year, including lower Federal Reserve interest rates, a growth-friendly tax and spending bill, double-digit earnings growth expectations, and the ongoing boom in artificial intelligence investments, gains of late have been muted.

The S&P 500 is up a meager 0.66% from its pre-Thanksgiving close, and just 0.9% higher over the past month. The benchmark’s record high, printed in late October, remains firmly in sight, but thus far the expected December rally has yet to materialize.

There are good reasons for that.

To begin, while official data is back online following the end of the government shutdown, release delays, calendar quirks, and holiday anomalies continue to play havoc. Friday’s PCE inflation release, typically a must-read given its importance to Fed forecasts, will only cover the month of September.

The next jobs report from the Bureau of Labor Statistics, meanwhile, will arrive on Dec. 16, nearly a week after the Fed will both deliver its final rate decision of the year and also unveil fresh growth, inflation, and unemployment forecasts for the world’s biggest economy.

The economic picture is confusing enough without the odd release schedule. Last week’s reading of jobless claims showed the second-smallest Thanksgiving tally since 1970, even as data from the private sector showed ongoing weakness in hiring and a big increase in layoffs.

Services sector activity, however, was notably solid last month, and a key component of input costs fell the most since March of last year.

“Investors are trying to reconcile this ‘K-shaped’ economy of a strong, well-off consumer and a struggling paycheck-to-paycheck consumer,” said Louis Navellier of Navellier Calculated Investing.

The challenge in both constructing and interpreting the hodgepodge of post-shutdown data is also being complicated by uncertainty over the next Fed Chair.

Kevin Hassett remains the odds-on favorite, and his appointment is likely to be announced in early January, but reports already suggests bond markets are concerned that his dovish stance on rates, paired with his loyalty to President Donald Trump, will inject undue influence on Treasury yields.

That’s not the case at present, however, and that suggests markets are still awaiting answers.

Treasury volatility readings are pegged at the lowest levels in 4 years, based on Merrill Lynch Option Volatility Estimate, better-known as the Move Index, and 10-year Treasury yields have been stuck in a tight 4% to 4.1% trading range for much of the past 3 months.

Break-even inflation rates, which capture the difference between inflation-protected bonds and regular Treasury notes, are also largely unchanged.

“If Hassett is expected to compromise inflation outcomes, this is where we would expect to see these concerns most clearly,” said Steve Englander, head of North American macro strategy at Standard Chartered Bank.

The Supreme Court is also set to rule on a key plank of the president’s economic strategy, his use of emergency powers to apply sweeping tariffs on U.S. imports, over the coming months. If those levies are deemed unlawful, a fresh round of tariff confusion could wash over markets in an echo of last April’s Liberation Day chaos.

But, yet again, volatility gauges are dormant. The Cboe Group’s VIX index, is back below the market-neutral level of around 16 points and trading at the lowest since late September.

Navellier suggests the recent outperformance in defensive sectors such as healthcare, basic materials and energy reveals that broader market caution.

“The year-end rally is still at the starting gate,” he said. “The trend remains positive, but still not as strong as a typical December, especially on the heels of a very good earnings season. But we may have to wait for the Fed cut next week for the Santa Claus rally to begin.”

Write to Martin Baccardax at martin.baccardax@barrons.com