What a Week: Whither Santa?

Like many of the seasonal trends that have come a bit early, a bit late, or not at all this year, the Santa Claus rally didn't arrive as scheduled.

The Dow Jones Industrial Average hit another all-time high Tuesday, but the week before Christmas ended on a down note. A mixed bag of economic data spurred more selling Friday amid light pre-holiday volume.

The Dow fell 0.6% Friday, and 0.8% on the week, while the S&P 500 closed down 0.5% Friday and 1.1% on the week. The Nasdaq Composite had its worst week since July, falling 2.3%, having slipped 0.6% on Friday.

Treasuries slid as well in a shortened trading session, sending yields to their highest levels in five weeks despite benign inflation data. Investors seem concerned that the stock rally has gotten extended, and worried that the Federal Reserve is not about to cut rates.

A central bank more inclined to cut rates means that another liquidity safety net is near. But with the economy strong enough to keep the Fed on pause, the markets are on their own, so to speak. And with most eyes turned toward 2007, investors also may be realizing that the rate-setting Federal Open Market Committee is about to get more hawkish.

Friday started with the Fed's preferred measure of consumer inflation, the core personal consumption expenditures deflator, coming in below expectations, which should be bullish for stocks and bonds. Core PCE was flat for November, compared with analysts' predictions for a 0.1% rise. The reading brings year-over-year inflation to 2.2% from 2.4% last month, and it confirmed the flat November core CPI reading that investors rejoiced in last week.