Many investors believe the U.S stock market will experience a strong finish of the year. Some even go further and say the so-called Santa Claus rally is already here. But before we delve into the matter, let’s see what’s this rally all about.
Santa Claus rally explained
A Santa
Claus (or Christmas rally) rally describes a sustained increase in the stock
market that occurs in the last five trading days in December and the first two
trading days in January.
The reasons
behind this theory are simple enough: increased holiday shopping, optimism
fueled by Christmas, or investors settling their affairs before the year-end
vacation. Also, many consider the Christmas rally to be a consequence for
people buying their favorite shares in anticipation of rising prices in
January.
It's also
true that people expect a Christmas rally, and usually, they get one. Approximately
two-thirds of the Decembers in nearly 60 years have resulted in positive gains
for shareholders and stock market traders.
The case for a Santa Claus Rally this time around
There are several
major arguments in favor of a Christmas rally this year: Fed’s more stable
monetary policy, steady gains in the global stock markets (with the S&P 500 as one of the
top performers), and increasing optimism regarding a China trade war
resolution.
Since 1950, the S&P 500 index has gained an
average of 1.3% during this stretch, about six-and-a-half times the average
seven-day rolling performance of 0.2%, according to Dow Jones Market Data. For
the Dow Jones Industrial Average, the average return is a touch better during
this stretch at 1.4%.
S&P has gained 25.3% year-to-date, putting it on
track for its best annual showing since 2013, when it rose 29.6%. For it to
surpass that year’s performance, the S&P 500 would have to gain 3.5% in
December, a performance the index has matched or beaten in November, June,
April and January of this year. If the S&P 500 can achieve this feat, 2019
would be the best year for the index since way back in 1997, when it rose 31%.
Fed signals more stability
Last year, the markets were deeply concerned the U.S central bank would continue increasing rates at an accelerated pace.
This year, things have changed, with
the Fed cutting down rates. More importantly, there's a more precise direction shown,
which can only positively influence the markets.
The global stock markets posted
better results in 2019
The latest Earnings Seasons was very
good for most U.S companies. However, this year, the global stock markets have managed
to achieve even more: they synchronized their strong performances like they
haven’t done in quite a while. If results are favorable throughout the world's
biggest markets, investors will have room to take risks and pump more capital.
The logical consequence can only be a late rally.
Trade war optimism
Even though
the U.S – China trade war dispute is still unresolved, there have been recent
talks about a preliminary agreement. Financial analysts see this as a good sign
that can lift stock prices heading into 2020. Nobody knows for sure what will
happen, but one thing is certain: things don’t look as bleak as before.
Conclusion
All
conditions appear to be in place for yet another Santa Claus rally. Although
the markets proved to be unpredictable in the past year, investors advise
keeping a close eye on stocks at the end of December and beginning of January
and trade shares when
the opportunity arrives.
Sources: cnbc.com, reuters.com,
ccn.com, fool.co.uk, thestreet.com, refinitiv.com, thompsonreuters.com
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