“Santa Claus Rally” Threatened by COVID-19 Resurgence, Georgia Elections By Reuters
© Reuters. FILE PHOTO: ‘Santa Claus’ rides a bicycle on the city street
By David Randall
NEW YORK (Reuters) – Concerns over a resurgent coronavirus pandemic and impending U.S. Senate outflow in Georgia tarnish prospects for a historically strong season for stocks.
According to CFRA Research, stocks tended to perform well over the last five trading days of December and the first two years of January. This phenomenon is known as the Santa Claus rally and has raised stocks in 55 out of 74 years since 1945. This year the period starts on December 24th.
According to the stock trader’s almanac, the average Santa Claus rally has increased 1.3% since 1969. Overall, a year with a Santa Claus rally is followed by an average annual increase of 9.7% for the S&P 500 in the following year, compared to an average increase of 9% for the S&P 500 over all years, according to CFRA Research.
But despite S & P’s rally in the quarter and year-to-date earnings of around 14%, a Santa Claus rally this year is far from natural, investors said.
Concerns about a new variant of the coronavirus and weak economic values have weighed on stocks in recent days. The S&P 500 is down 0.7% since hitting record highs on Dec. 17 as some investors are making profits.
US consumer confidence fell for a second straight month in December, data showed on Tuesday. This reflects a coronavirus wave that has resulted in renewed business restrictions despite the introduction of vaccines.
A little further ahead, there are two U.S. Senate races on Jan. 5 that could give Democrats control of the chamber and potentially pave the way for lawmakers to advance some of President-elect Joe Biden’s proposals that investors have viewed as unfriendly to the market including tax hikes and pulling back on deregulation in the Trump era.
“The market is currently on autopilot as we near the end of the year. However, in the short term, we are vulnerable as we near the Georgia runoff,” said Sam Stovall, chief investment strategist at CFRA Research. “If it looks like we’re getting two Democrats … that might be enough to make investors rethink how bullish they want to be.”
More than 1.1 million Georgians have already cast their ballots for the competitions on January 5th. This equates to a participation that can compete with the presidential competition in November, in which the Democrat Biden won the 16 votes of the state electoral college by a gossamer head start on the way to victory over Republican President Donald Trump.
Should Democratic candidates Raphael Warnock and Jon Ossoff win the runoff, the US Senate will be split 50% between Democrats and Republicans, and Vice President-elect Kamala Harris will remain the casting vote.
Overall, the broad stock market has focused on the economic contract https://www.reuters.com/article/us-health-coronavirus-usa-congress/after-months-of-inaction-us-congress-approves-892 -billion- covid-19-relief-package-idUSKBN28V176, which passed by Congress on Monday, and introducing coronavirus vaccines rather than increasing political risk, said Craig Johnson, technical marketing strategist at Piper Sandler (NYSE :).
“We believe these catalysts were largely involved in the record-breaking rally in the market,” he said. “The risk of uncertainty about how quickly they will lead to significant economic improvement remains uncomfortably high,” he added, despite maintaining a 2021 price target for the S&P 500 of 4,225, which is roughly 14% was above the current index price.
This year’s rally in the S&P 500 has raised its price-to-profit valuation to 23.1, which is close to its highest level in history due to extensive government stimulus programs and unprecedented monetary support from the Federal Reserve.
Those setbacks have priced out of the market for perfection and given it little more room without running another catalyst, said Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research.
“We’re a little over the top for a retreat in the short term and investors are looking forward to a few races that could mean a significant change in personal and corporate tax rates,” he said.
If it looks like the Democratic candidates will win both seats in the Georgia Senate, “things could get really sour, although the long-term outlook looks pretty good,” added Frederick.