Santa came calling on Wall Street, bringing in his bag of goodies a modest rally that – if history is a guide – may continue into year-end.  For the first time in a month, the US was not the biggest worldwide gainer.  That distinction is held by China, gaining +3.5% on news of the easing of Central Bank lending restrictions.  China pulled Emerging International into the lead amongst the world’s broad indices with a gain of +1.5%.  The US indices gained +1.1% on average, with the Small Cap Russell 2000 leading the charge for the third week in a row.  Beaten-down US Small Caps have staged a late-year revival, but still are the year-to-date laggards amongst US indices.  Developed International brought up the rear with a gain of +0.9%, held back by Japan’s lackluster +0.4% gain.  Canada’s TSX rose +1.0% as many energy stocks stabilized or gained.  Both Emerging International and Developed International indices are in the red for 2014 and look unlikely to pull into the green in the remaining three trading sessions of this year.

US economic news was dominated by the “final” reading of third-quarter GDP: a whopping +5.0%.  That is the best since Q3 of 2003, 11 years ago.  The Q2+Q3 combined performance was also the best two-quarter performance since 2003, so Q3 was not just a singular fluke.  Consumer spending rose at a strong +3.2% annual pace in Q3, up from the +2.5% pace of Q2.  A CNN/ORC poll revealed that – for the first time in seven years – a 51% majority of Americans have a positive view of the economy, a sharp increase from the 38% who felt that way in October.  It is not a coincidence that the rise in economic views coincided with the collapse in oil and gasoline prices.  On the negative side, November durable goods orders were down -0.7% when an increase was expected, and November existing and new home sales were both less than forecast and down vs October, despite a record-low 30-year fixed mortgage rate of just 3.8%.

Canada’s stock market remains largely tied to the materials sector, which makes up a third of the Toronto Stock Exchange weighting.  And this year has not been good for materials producers or processors.  Everyone is aware of the plunge in energy prices, but many other materials produced in Canada have also had a rough ride in 2014.  Iron ore lost nearly half its value to reach the lowest price in more than five years.  Coal, silver, potash, copper and lead prices also weakened in the past year.  The carnage wasn’t universal, however, as nickel, uranium, aluminum and zinc managed to hold steady or gain this year.

Christmas week meant no economic news was released in Europe.  But in Japan, there was a slew of bad news.   Industrial production was down -0.6% in November vs October where a gain was expected, retail sales were down ‑0.3%, consumer prices ex-fresh food (their core) were up only +0.7% after stripping out the effects of April’s sales-tax increase vs the government’s +2% target, while real wages fell the most since 2009, down -4.3% last month vs a year earlier.  Japan has already had two down quarters in a row and now growth in the fourth is very much in question.  Also, for the first time since records were collected in 1955, Japan has a negative savings rate. Japan is a country that is aging rapidly and the Japanese are drawing down their savings.  Household spending is correspondingly down -2.5% as well.  This is a look into the future of many other countries, particularly those in Northern Europe.  Japan’s Cabinet on Saturday approved about 3.5 trillion yen in fresh stimulus to fight the recession.

China’s overcapacity problem is becoming critical.  Factory-gate prices, as producer prices are known in China, have fallen in year-over-year terms for 33 consecutive months.  An op-ed in the Financial Times notes that “The consequences of China’s deflation problems are ubiquitous and spilling into the rest of the world. Slower economic growth and a steady decline in the [Chinese] economy’s commodity intensity is already affecting commodity producers from Perth to Peru, with negative multiplier effects arising from lower revenues and reduced capital spending by resource companies. Moreover, as Chinese companies cut prices to clear excess supply, global competitive pressures intensify, forcing foreign manufacturers to do so too.  China’s structural deflation, along with factors such as excess debt and rapid aging, will continue to have repercussions for monetary policy in advanced economies worldwide…The U.S. Federal Reserve and other western central banks have failed to anticipate this deflation environment…and appear powerless to reverse the trend.”

As many have suggested, falling energy prices are a boon to consumers.  A surprise to some, though, is the fact that falling energy prices also are a boon to the stock market despite their obvious negative implications for the stocks of energy producers and processors.

Sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, St. Louis Fed, fivethirtyeight.com

ETF Trade Advisor wishes you Happy Holidays!