Global Tensions Stymie Year-End Rally

Global Tensions Stymie Year-End Rally

The murder of Russia's ambassador to Turkey on Monday followed the Chinese seizure of a US Navy research drone last week as signs of global tension and unrest that is likely to continue in 2017. Meanwhile remarks by Fed Chair Janet Yellen and the continued rise in oil prices helped stocks continue their advance and gold its decline. How long can these trends last?

Hacker at work |
Hacker at work | Getty Images

The traditional year-end rallies showed up in US and global stocks in 2016, with the post-election rally adding a boost to the so-called Santa Claus rally. That term refers to any rise in stock prices in December that analysts and commenters can blame on a surge in shopping. If Black Friday, the shopping day after the US Thanksgiving holiday, showed robust sales, that can often be enough of a trigger to get investors watching large retailers for clues about the strength of the economy. 

In an economy like ours, driven by consumer demand, an annual display of the average American's willingness and ability to buy stuff is a big deal. It shows not only that people have money, but they are willing to spend it rather than save it or use it to repay debt (which most Americans in 2016 have). Why do investors like it when consumers spend rather than hold onto their cash? Think about when you feel comfortable spending. It's when you know there's more coming in, when you have some certainty about your future income. 

While the US has broken records for the number of months of job growth and number of weeks when the jobless claims number was under 300,000, the big criticism has been that these were poor quality jobs: part-time or lacking benefits or just low-paying. Many of them have been. One feature of any recession and recovery since the 1970s has been that the jobs lost in the recession were higher-paying than the new ones people got in the recovery. Add to that the trend of companies laying off workers only to replace them with technology like assembly-line robots and word-processing software, and in many cases, jobs like factory worker and office assistant are simply going away.

It hasn't been a jobless recovery. The US economy created over 10 million new jobs during the Obama administration, more than the rest of the G7 nations combined. But until recently, there were not many signs that the recovery was creating jobs of the kind that make people feel confident enough to replace their 10-year-old cars and laptops and do some house-hunting. 

That's why the comments from Fed Chair Janet Yellen, delivered to a group of graduating University of Baltimore students, were so well received: “After years of a slow economic recovery, you are entering the strongest job market in nearly a decade,” she told them. “There are also indications that wage growth is picking up, and weekly earnings for younger workers have made strong gains over the past couple of years.”

After last week's rate increase, it was a sign that not only is the Fed confident in the move they made, they are confident about the larger picture as well. That kind of optimism by itself tends to be good for energy prices. People commuting to jobs (and stores) use up gas; businesses that are open and running use electricity. And with OPEC seemingly firm on its agreement to curtail output, crude oil futures have enjoyed their own Santa Claus rally. Despite the fact that Santa's sleigh uses alternative energy. 

This would seem to explain why gold prices have sunk steadily since the election. Gold is traditionally seen as a safe haven. So when consumers and investors feel a little safer about the state of the economy, they don't need the haven as much. The problem is, nothing about this holiday interlude indicates that the safety and certainty will last for very long. There are numerous uncertainties we will live with in 2017. 

As if to remind us that they are one of those uncertainties the US will have to live with, China picked up a US Navy research drone in the South Pacific and is negotiating with the US to return it. They seized it 50 miles from Subic Bay, Philippines, historically a major US naval base. The incident seemed designed to provoke a Twitter response from the president-elect and allow China to flex its muscle, which it has. For example, the Chinese could easily have diffused tensions by blaming a rogue captain. Instead, they are enjoying the uncertainty and their ability to show the world how easily China can stir the waters, pardon the pun. 

The assassination of Russia's ambassador to Turkey, Andrey Karlov, by an assailant who yelled "Don't forget Aleppo!" at the live TV cameras before being chased and killed by police, is the latest unnerving reminder that the conflict in Syria, which involves all the regions powers including the US and Russia, could have many repercussions beyond the humanitarian tragedy. It involves one of the last strongholds of ISIS and a test of Russia's ability to prop up a brutal dictator, Bashar al Assad. 

This comes at the same time the CIA and FBI have now reported that Russia actively interfered in the US election, news which has not yet affected the US dollar index or the stock market, but may yet have an effect. When the world's most powerful democracy faces an outside attack on its basic ability to choose its leaders, it's significant. For now, however, an incoming president with both houses of Congress working with him and little resistance in pursuing his agenda is bullish for investors, because it gives them a sense that they can predict what the new president will do. 

However, his promises to both cut taxes and spend on infrastructure will be tricky to pay for and implement, which has led some investors to decide to cash out of their stocks until some time after the inauguration. Funds and companies are suspected to be sitting on unprecedented amounts of cash as it is. Whether they will put that into stocks again in the coming quarter remains to be seen. They may just as well decide to put it back into gold, especially if India can work out its currency note crisis in time for the spring wedding season, when Indians traditionally buy a lot of gold and push prices higher. 

Could gold's downtrend be turning into a bottom? No one can say for sure. You could give the same answer to the question, "Do stocks look like they're topping out?" Yeah, sorta, but again, they looked that way in late November. The best advice may be this: be aware of the long-term forces at work, like a major change in US government policies, unrest in Syria or tensions with China, or further Russian meddling in the US media and other institutions. They're all out there and not going away soon. At the same time, you can take advantage of the volatility by trading the short-term moves of the market with the protection of limited risk. Stock indexes, oil, gold, and other markets are exhibiting nice, strong intraday trends. And don't forget to take some time off to enjoy the holidays.

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