After a torrid three months, December saw a cold wind chill Wall Street.  Will stocks end the year in the deep freeze or get a lift from an end-of-year heat wave? 

The Big Picture 

Signs of economic strength, most notably in the last employment report, have increased the chance that the Federal Reserve will begin to remove the training wheels from the economic bicycle.  With the last FOMC meeting of the year with Ben Bernanke at the helm this Tuesday and Wednesday, speculation is rife that the massive program of monetary accommodation will come to an end.    

Timing the Fed is just about as hard as timing the market, but that hasn’t stopped investors before, and it won’t stop them now.  With the Dow Industrial, Transports, S&P 500 and Russell 2000 index hitting new highs in November, it was tempting to take profits.  Year-to-date the Dow Industrial are up 20.23%, the S&P 500 is sitting on a 24.5% gain, the NASDAQ at 13-year highs and above 4,000 has added 32.5% while the Russell 2000 reflects a gain of 30.34% for small cap stocks. 

These gains come in spite of political gridlock, sequestration and a government shutdown along with a disastrous roll out of the Patient Protection and Affordable Care Act, aka ObamaCare.  It’s hard to imagine what might derail the bullish trend that characterized 2013.  

The labor picture has improved dramatically with non-farm payroll growth averaging 193,000 since September.  The housing market appears to have stabilized with mortgage rates remaining at historically low levels.  Vehicle sales are on the rise, a function of older cars being replaced; incentives offered by dealers and increased showroom traffic.  Have you noticed the ton of TV ads for trucks and autos? 

This morning’s release of industrial production showed strength at the nation’s mines, factories and utilities – part weather related but also a pickup in manufacturing activity – a good sign for future economic growth. 

I, Investor 

Tomorrow’s reading on November consumer price index should show little inflation at the retail level.  Wednesday’s housing starts data for November will be overshadowed by Fed Chairman Bernanke’s press briefing and FOMC policy statement and economic projections.  Thursday weekly jobless claims data will be joined by the leading economic indicator series, November existing home sales and December’s reading from the Philadelphia Federal Reserve.  Friday brings the final revision to third-quarter GDP and possible Senate vote on Janet Yellen as the first woman and next Federal Reserve Chair. 

Markets slip into serious holiday mode next week, with an early close on Tuesday, Christmas Eve and light volume expected on the Thursday and Friday after Christmas.  Expect continued end-of-year window dressing from portfolio managers and individual portfolio re-balancing and tax-loss selling ahead of the last trading day of the year.

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