After a period of turbulence, the decks may be cleared for a good old-fashioned Santa Claus rally in the week ahead.
Stocks were higher in the past week, after a rough stretch that continued into Monday. The S&P 500 recovered and is up about 3.5% for December as of Thursday.
“I think all the things we’ve been concerned about for the month of December to a certain extent, are in the rearview mirror,” said Art Hogan, chief market strategist at National Securities. “We know what the [Federal Reserve] is going to do. We know while this new variant spreads faster, it’s not as dangerous, and we know Build Back Better legislation is now 2022′s business... I think the market can find a path of least resistance to the upside as we wrap things up.”
The market has a lot of history on its side that trading days before the year-end are positive for stocks. According to the “Stock Trader’s Almanac,” the Santa Claus rally period — the final five trading days of the current year and first two of the new year — is mostly a time when the stock market gains. The S&P 500 has been positive nearly 79% of the time on those days since 1928 and has gained an average of about 1.7% per rally.
Add to that the fact that when the market has had a strong year, the momentum historically has carried into the final trading sessions. In that regard, the S&P 500 is up about 25% for the year.
According to Bank of America, when the S&P 500 has already seen such solid gains, the final six sessions are positive. Since 1980, there have been 10 instances where the S&P 500 was up 20% or more going into the last stretch of trading and in nine of those years, it ended the final six days higher.
A notably rocky December
Stocks head into the final sessions of the year with a tailwind, after several weeks of choppiness.
“This has been the fourth rockiest December since 1987. The average daily move for the S&P 500 has been 1.1%,” said Hogan. “That’s a lot of action.” The most volatile Decembers were in 2000, 2008 and 2018.
Hogan said volume in the last week of the year is typically 20% to 30% lower than normal. “In a low-volume environment, when the market picks a direction, it tends to move in that direction in a robust fashion,” he said.
Paul Hickey, co-founder of Bespoke Investment Group, said positive news on the Covid omicron variant this week was the catalyst that reversed the market’s sell-off. There were studies showing omicron to be milder than other variants of the coronavirus. Further, the Food and Drug Administration approved pills from Pfizer and Merck for the treatment of Covid-19.
“Whereas the market was focusing on everything that could go wrong since Thanksgiving, people are now just taking a sunnier view,” Hickey said. He expects that view will likely prevail in the coming week.
“As we get toward the beginning of January, we’ll see how markets are positioning themselves,” Hickey said. He said investors will start to turn their attention toward the upcoming earnings season; they do not seem to be overly optimistic, which could spell some upside surprises.
“Going into the last earnings season, there was a ton of negative sentiment based on supply chains, inflation and labor shortages. We ended up having a decent earnings season. It’s more mixed this time,” Hickey said.
High-growth stocks hit
The selling in November and December dented stocks. Some high-growth stocks and ETFs were down sharply as investors moved into safety plays. Funds that took their lumps in December include the Ark Innovation ETF and iShares Expanded Tech Software Sector ETF.
“I think some of these growth areas that have gotten hit hard will do a little better. They could see a bounce early in the year,” Hickey said. “They sold off for a number of reasons. One was concerns over the Fed. Also people had made so much money, and the feeling was taxes are going up. People were selling stocks ahead of higher taxes. That’s more of a question now with a divided Congress.”
