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Santa May Not Show Up This Year For The Market & This Is Why

Santa May Not Show Up This Year For The Market & This Is Why

The Santa rally may not materialize in this unprecedented year with the market facing some serious risks. Here’s what investors should know now.

Santa Clause is coming to town, but he may not bring with him good cheer for stocks.

2020 has been an historic year by pretty much all measures, including the stock market, which has seen the shortest bear market in history only to rise to new all-time highs.

“This is going to be the first year in history that stocks were down 30% for the year at one point and managed to finish higher,” said LPL’s Ryan Derrick. “That, to me, summarizes a lot. We’ve never seen a round trip like 2020.”

After a record-fast drop into a bear market in March, stocks have since recovered and the S&P 500 just notched a new all-time high and is up 14% for the year.

The index had its second best November in history, rising 10.9%, and the month was the 22nd best month for the S&P 500 ever. 

As for December, Yardeni Research noted that the S&P 500 gains 1.3% in a typical December, which is higher than the average monthly gain of 0.64%. Not only that, but the index has risen in 67 of the pas 92 Decembers the firm has analyzed, which is the highest frequency of gains for any month.

But even as the index is so far up 1.6% for the month, there are indications that this December may not see the Santa rally it typically does.

Roughly 76% of S&P 500 components are trading above their 50-day moving averages, which Canaccord Genuity Strategists says means the index is in “extreme overbought” territory. 

“Expect [a] tactical near-term correction,” said Canaccord Genuity market strategist Tony Dwyer, adding that it’s not likely we’ll see a technical correction of 10% or more in the market, but rather a drop of several percentage points.

“Headline risk will be elevated over the next few days,” Dennis DeBusschere, head of portfolio strategy research at Evercore, said in a note. “Expect some consolidation in risk assets into year-end ahead.”

The risks DeBusschere is referring to are already starting to pop up. 

Investors are expecting billions of doses of COVID-19 vaccines to be distributed in 2021, but that upside has already been realized and any difficulties with production or distribution are big downside risks. 

The market is also pricing in the prospect of another round of stimulus. But congressional leaders have been negotiating a new bill for months, and while a new proposal is nearing agreement, there’s still a possibility a deal to aid small businesses and households won’t materialize before Christmas or will be underwhelming. 

“To me, the most market moving piece of information is, do we or don’t we get a stimulus package?” said Art Hogan, chief market strategist at National Securities. “The market has priced one in, so the biggest disappointment is if we don’t get one. The tug of war between the virus and vaccine had a tiebreaker in stimulus.”

And if a deal doesn’t happen by February, Bryn Mawr Trust Wealth Management chief investment officer Jeff Mills says stocks could react poorly.

Even with the Pfizer (NYSE: PFE) and BioNTech (NASDAQ: BNTX) coronavirus vaccine already approved and being distributed, and with approval of Moderna’s (NASDAQ: MRNA) vaccine likely this week, it’s really Congress the market is looking to now.

“I think [the vaccine] propels us into the year-end and higher levels,” Hogan added. “It only takes one of these things to pull over the apple cart, and the one that could matter is Congress not getting something out the door on stimulus. That would pull us back the hardest.”

One other risk is that fund managers are getting close to fully invested.

Bank of America found in a recent survey that hedge funds long exposure to stocks has hit the 75th percentile historically and institutional fund managers are holding an average of 4% of their portfolios in cash, dropping from 6% in March. The firm says such a position is a “sell signal” that historically indicates the S&P 500 will drop 3.2% over the next month.

With these downside risks, the market will need a new and surprising catalyst to propel it higher. The question now is, will Santa deliver?

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