Big features in November may make the standard “Santa Claus rally” on the finish of the yr much less doubtless
Santa Claus visits the New York Stock Exchange.
Brendan Mcdermid | Reuters
A big rally at the end of the year? Don't be too excited just yet.
December is traditionally an upward month: since 1945, the S&P 500 has surged nearly 1.5% in all of December and soared in price 73% of the time, according to Sam Stovall of CFRA Research.
But hopes for the usual "Santa Claus rally" may need to be tempered a bit this year.
On the one hand there is the mighty November rally.
The S&P 500 closes November at 11.2%, the fourth-largest gain ever, but only the second-largest gain this year after April, up 12.7%.
A strong November rally like the one we just had, however, often causes problems with the usual "Santa Claus rally" at the end of the year, according to Stovall.
The story "suggests the November surge may" steal from Santa, "he wrote in a recent statement to customers. Whenever the S&P 500 rose more than 5% in November, the market had a below-average gain and earnings rate in December. "
Huge November profits
November catalyzed a move in cyclical / value stocks that was much stronger and more sustained than previous increases in value, with significant gains in traditional value sectors like energy and banking, as well as gains in broader cyclical groups like industrials and commodities. However, the growth (technology) has not seen significant sales as many investors are still skeptical of the value rotation. While defensive / consumer groups like Health Care and Consumer Staples have lagged, they too have seen healthy mid-single-digit gains.
This created the Goldilocks scenario that we see now.
Style investing in November
Value: plus 14% growth: plus 9%
Industries in November:
Energy: plus 34% banks: plus 20% industry: plus 17% materials: plus 13% technology: plus 10% communication services: plus 10% disadvantages discretion: plus 9% cons. Staples: plus 8% REITs: plus 7% healthcare: plus 7% utilities: plus 3%
What am i worried?
The market has bigger problems than dealing with historical trading patterns. There are very rosy assumptions about the future.
All this upside has feared many that the market believes American companies will weather the "Covid Winter" relatively unscathed and emerge early in the second quarter of 2021 with a widespread vaccine that will reopen the world economy.
With markets at historic highs, a lot can go wrong with this story.
"The global reflation story is very compelling," said Alec Young, chief investment officer at Tactical Alpha. Perhaps too much conviction: "Right now the cop story is intact but the position is crowded and everyone knows the topics of conversation. Where could the consensus be wrong? What's the blind spot in all this coping?"
Stress test of the Goldilocks scenario
The markets have recovered by four "buckets":
1) The reopening: the market is acting like the Covid winter we are entering. This will be a little bump on the way to spring reopening and global reflation is now upon us.
UBS's Art Cashin isn't so sure about the smooth transition to the spring reopening.
"There are a lot of little things that could go wrong in the next few months," he told me. "Everyone assumes a smooth vaccine, a smooth power transmission."
None of this is insured, he told me. His biggest concern is geopolitical: "We have a brand new president, there has been an assassination attempt in Iran, and this new president is being tested very quickly, especially in the Middle East."
2) Incentives: The policy of closing a major incentive ahead of the Georgian Senate runoff on January 5 seems increasingly distant. There is hope that a December 11th budget deal will offer limited incentives. But big stimulus programs seem very far away: reports over the weekend suggest Senate Republicans could now take austerity measures in 2021 to help contain the deficit.
3) Georgia Senate Race: Seasoned trader Joe Zicherman of Stadium Capital had a profitable year but has options on his long positions and recently bought puts in late January and late March.
The reason: "If the perception arises that the Democrats win the two Georgia races and the Republicans lose the Senate, and everyone thinks corporate and personal taxes are going up, the market is 25% overpriced," he told me.
He also noted that there is an unusually high level of speculative money in the market. "People buy trash and that's always a sign that people can't find value."
3) Vaccine: The market assumption that vaccine distribution will occur in a smooth series of rollouts culminating in a mass distribution early in the second quarter of next year is also questionable, as Cashin has pointed out.
Former Treasury Secretary Larry Summers believes enough people will be vaccinated by next September so that the pandemic won't be a mega-factor in the economy, but fears that "something could go wrong with the vaccination process," he told Wall Street Week “Over the weekend.” The virus could mutate, a new virus could emerge, it could turn out that people who had Covid have more lasting after-effects than we estimate today. Therefore, there are some real risks associated with playing out Covid over the long term. ""
4) Assessment: The growth projections for Q4 2019 and Q1 2020 are being lowered, and in the past few weeks, earnings growth for the S&P 500 has changed little in the fourth or first quarter. This is a trend reversal at the beginning of the year when earnings are estimated to be rising rapidly.
Cashin, who has seen a fair share of irrational market exuberance in his 60 years on the NYSE floor, says traders chose to believe in the glorious reopening of spring: "They're buying the reopening package because they're calming themselves down . " I'm not buying for tomorrow, I'll buy in six months. & # 39; And maybe that's true, "he told me, but a lot could go wrong before glorious spring reopens.
Subscribe to CNBC PRO for exclusive insights and analysis as well as live business day programs from around the world.