Market Perspective for November 14, 2014

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.

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