By David Randall
NEW YORK (Reuters) – Concerns over a resurgent coronavirus pandemic and the impending US Senate runoff in Georgia overshadow the outlook for what has historically been a season-long period for equities.
Shares have tended to perform well the last five trading days in December and the first two January, a phenomenon known as the Santa Rally that has lifted stocks for 55 out of 74 years since 1945, according to CFRA Research. This year, the period starts on December 24.
The average Santa rally has increased it by 1.3% since 1969, according to the Stock Trader’s Almanac. Overall, a year of Santa Rally is followed by an annual average gain of 9.7% in the S&P 500 the following year compared to a 9% average gain in the S&P 500 in all years, according to CFRA Research.
But despite S & P’s rally in the quarter and its annual gain of around 14%, a Santa’s rally this year is far from a given, investors said.
Concerns about a new variant of coronavirus and weak economic readings have weighed in on equities in recent days, with the S&P 500 down 0.7% since reaching record highs on December 17, with some investors locking gains.
U.S. consumer confidence fell for the second month in a row in December, data on Tuesday shows, reflecting a coronavirus wave that has spurred renewed business restrictions despite a vaccination.
Further ahead, there are a couple of U.S. Senate races on Jan. 5 that could give Democrats control of the chamber and possibly open the way for lawmakers to move forward on some of President-elect Joe Biden’s proposals that investors have deemed unfriendly in the market. , including raising taxes and returning deregulation of the Trump era.
“The market is on autopilot right now as we move toward the end of the year, but in the short term we are vulnerable as we get closer to runoffs in Georgia,” said Sam Stovall, CFRA Research chief investment strategist. “If it looks like we’re getting two Democrats … that might be enough to get investors to reconsider how bullish they want to be.”
More than 1.1 million Georgians have already cast their ballots for January 5 contests, a level of participation that is in pace to compete with the presidential contest in November, in which Biden, a Democrat, won the state’s 16 electoral ballot with a shaving margin. on the way to defeating Republican President Donald Trump.
Should Democratic candidates Raphael Warnock and Jon Ossoff win in the runoff, the U.S. Senate will be split 50-50 between Democrats and Republicans, leaving Vice President Kamala Harris as the draw.
Overall, the broad stock market has been focused on the stimulus agreement https://www.reuters.com/article/us-health-coronavirus-usa-congress/after-months-of-inaction-us-congress-approves-892 -billion- covid-19-relief-package-idUSKBN28V176 passed by Congress on Monday and the roll-out of coronavirus vaccines rather than increasing political risk, said Craig Johnson, technical market strategist at Piper Sandler (NYSE :).
“We believe these catalysts have largely been discounted in the market’s record high rally,” he said. “The risk of uncertainty about how quickly they will translate into meaningful economic improvement remains uncomfortably high,” he added, although he maintained a 2021 target for the end of the year on the S&P 500 of 4,225, approx. 14% above the current index price.
This year’s rally in the S&P 500 has pushed its forward value to earnings valuation to 23.1, near the highest level in history amid extensive government stimulus programs and unprecedented monetary support from the Federal Reserve.
These backstops have left the market to perfection, giving it a little more room to run without another catalyst, said Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research.
“We are a little exaggerated for a short-term withdrawal, and investors are looking forward to a few races that could mean a significant change in tax rates for individuals and companies,” he said.
If it looks like the Democratic candidates are set to win both Georgia’s Senate seats, “things could get really sour, even if the long-term prospects look pretty good,” Frederick added.