What's Behind This Santa Clause Rally?

The shortened trading week certainly didn’t slow down investors. Santa Claus may have come to town on Wednesday, but on Wall Street the Santa Claus rally stuck around through the end of the week. And it was business as usual for many public and private research firms as they released several economic reports in the past few days, covering personal income, durable goods orders, new home sales and jobless claims. Let’s sift through the latest economic data out there and determine what this will mean for our investments.

Holidays Put Americans In a Spending Mood

In November, personal income rose 0.2% and consumer spending ticked up 0.5%. So income grew more slowly than expected while spending growth met expectations—economists had predicted 0.5% growth for both metrics. Because spending grew at a faster pace than income, the savings rate dipped to 4.2%, down from 4.5% in October. The key takeaway is that consumer spending rose the most in five months. Much of this was on big-ticket items like automobiles and auto parts. The fact that spending continues to pick up is one reason that the Fed decided to taper. Fed Chairman Ben Bernanke said “With fiscal restraint likely diminishing and with signs that household spending is picking up, we expect economic growth to be strong enough to support further job gains.”

Businesses Become More Confident for 2014

In November, durable goods orders rose 3.5%, led by aircraft and transportation orders. This outpaced the 2.2% gain forecast by economists. Excluding volatile transportation orders, durable goods orders still rose an impressive 1.2%, which is the highest since May. Orders for core capital goods rose a healthy 4.5% in November. I’m encouraged that durable goods orders ex-transportation rose the most since May and that core capital goods rose the most since January. It appears that businesses are entering the New Year with more confidence and are investing accordingly.

New Home Sales Remain New Multi-Year High

In November, sales of new single-family homes declined 2.1% to a 464,000 annual rate. This was a smaller drop than expected—economists had called for a 433,000 annual rate. The supply of new homes declined to an inventory of just 4.3 months, down from 4.5 months in October. While new home sales declined, they still remain close to the fastest annual pace since 2008. Consumers are becoming used to the recent rise in mortgage rates. Meanwhile, the persistently tight inventory of new homes bodes well for rising home prices. So the housing market remains a bright spot for the U.S. economy.

Jobless Claims Bounce Back in a Big Way

Last week, new unemployment claims plunged 42,000 to a 338,000 annual rate. This was significantly stronger than economists’ consensus forecast of 350,000. The more stable four-week moving average rose 4,250 to 348,000. This time of year, weekly jobless claims tend to have wild swings. But after rising 75,000 in the previous two weeks, the bigger-than-expected drop in new jobless claims was a pleasant surprise.

Overall, this week’s economic news was very bullish and we seem to be in store for a prosperous New Year!

Sincerely,

Louis Navellier

Louis Navellier

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