Three Thoughts on Yearend Market Action

In a matter of two short trading sessions, the Dow Industrials have surrendered 410 points. As an investor you must ask yourself if there is more to this move?

Are we setting up for a year-end selloff as opposed to a Santa Claus rally?

It is important to take several considerations into mind.

Firstly, Chair Yellen has been decidedly upbeat in her and the Federal Reserve’s assessment of the U.S. economy in recent weeks. So much so that investors are cautiously expecting a move towards normalization in the Fed’s December meeting. That positive tone has been validated by steady employment gains, hints of inflation in several recent key data releases and continued economic expansion here at home.

Secondly, crude oil rallied sharply fromWednesday’s $39.94/bbl to 41.10/bbl yesterday on the news that OPEC has committed to stabilizing production and global pricing. Firmer crude prices will go a long way to remove a factor that has plagued equity pricing, not only in recent weeks, but for the better part of the past 18 months. As I have indicated this week, a coordinated move by the Saudis would likely be the only factor that had the potential of stemming crude’s selloff.

Thirdly, and somewhat perversely, the Euro rallied 3.07 cents versus the U.S. dollar yesterday in one of its strongest one-day rallies in years as a result of the markets reaction to the ECB’s monetary policy announcement. That rally illustrates two things; the Euro is no longer a one-way trade and in that event, the euro’s unpredictably positive price action versus the U.S. dollar will actually make a move on rates by the Federal Reserve a bit easier – if it does materialize.

Flickr photo: EnvironmentBlog