Year: 2014

Japan’s economy dipped into recession as expected in the third quarter. The announcement prompted a near 3 percent drop in the Nikkei and a small rally in the yen. The continued slowdown in the Japanese economy comes after a significant decline in the second quarter, caused by a planned hike in the sales tax, which led Japanese consumers and businesses to make purchases before the tax took effect. Another hike in the sales tax is planned for October 2015, but it’s expected a vote will be called early so that voters can decide the issue. If Japan delays the tax, the yen will likely depreciate further. The sell-off in Japan weighed on European markets, but the main impact, if any, will be felt in the currency markets.

In the United States, retail earnings season is in full swing. Wal-Mart (WMT) delivered a positive report and helped the retail sector rally to new highs for the year. This week, Best Buy (BBY), Home Depot (HD), Staples (SPLS), Target (TGT) and Lowe’s (LOW) headline a slew of retail earnings reports. Last week we also learned that retail sales were stronger than expected in October. The continued drop in gasoline prices is having a positive impact on the willingness of consumers to spend and we’ll likely see some optimistic guidance this week from retailers.

In economic data, domestic producer and consumer price inflation for October will be out this week. Both are expected to show deflation thanks to the drop in oil prices. On Wednesday, we’ll see the minutes of the last Fed meeting, when the decision to end quantitative easing was made. Later this week, the flash November PMIs for many nations will be released.

Major indexes have spent two weeks consolidating their gains following the rally that began in mid-October. Further consolidation or a mild pullback wouldn’t be a surprise given the bullish run. Oil still hasn’t rebounded and any bounce could weigh on the Dow Transports, which has been one of the strongest indexes in recent weeks.

Although stocks marched to new highs this week, the rally that started in mid-October may be slowing. While the markets had enjoyed their strongest run of the year, stocks only made small advances. It was inevitable that the gains consolidate at some point with the recent run-up. The Dow Transports, for instance, strung together a rally that approached 20 percent, a great return for an entire year, let alone 4 weeks.

One sector that didn’t pause this week was retail. Wal-Mart (WMT) shares jumped after the retailer beat earnings and revenue expectations. Retailers Macy’s (M) and J.C. Penney (JCP) also delivered strong earnings reports and the sector broke out to a new 52-week high, ending months of sideways trading. The move comes as consumer and retail sales haven’t been strong. On the retail side, firms have been moving inventory and cutting costs, shoring up their business amid slow growth for the overall industry. On the macro side, plunging oil prices have put a bit more money in the pockets of consumers, which helps the sector.

The drop in gas prices is only about four months old and hardly a long-term trend, it has spiked interest in SUVs. Sales of hybrid cars fell in October, while truck sales jumped. For retailers, this behavior is good news. If people are willing to make a long-term vehicle purchase based on the short-term changes in oil prices, it indicates others will be spending more this holiday season. Indeed, the rise in retail stocks has been almost as strong as the decline in oil prices. October’s retail sales growth came in at 0.3 percent, ahead of expectations of 0.2 percent.

Speaking of oil, the price tumbled again this week. Oil could easily slide to $70 a barrel and has little long-term support at this level. A move into the $60 range looks increasingly likely. The drop in oil is very good news for the U.S., which in addition to still being an oil importer has hundreds of millions of consumers who benefit from lower prices at the pump.

The same is not true for Russia. That nation is getting dangerously close to a financial crisis due to low oil prices, and Asian currencies are also on the verge of breaking down due to Japan’s devaluation of the yen. If those currencies slide, it will send oil prices even lower, while slashing the cost of imports into the U.S. This is all good news for American consumers, but potential trouble for overseas financial markets in the months ahead.

Even though stocks slowed this week and may consolidate recent gains over the days ahead, the economic data keeps moving in favor of U.S. markets. The potential for a rally over the remaining 6 weeks of the year is strengthening and should make investors very happy during the holiday season.