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 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.
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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