Supercharged. Stocks rose to fresh highs yesterday as traders applauded Trump’s signing of the stimulus bill. Help is finally on the way for pandemic-affected individuals and small companies, the real drivers of the US economy.
N O T E W O R T H Y
Dress for success. Yesterday, I wrote about Wall Street’s mythical Santa Clause Rally, which shows that stocks often rise during the last 5 trading days of the year through the first two of the incoming year. I will repeat what I wrote at least 3 times in yesterday’s note: there are no guarantees nor absolutes in the markets. The markets rarely do what is convenient for us… or at least with any consistency. That said, it is nice to be able to find anomalies that may… may improve our probability for success. Why then do stocks historically rise more often than not during this last small leg of the year? Yeah, yeah Christmas spirit and all, I get that, but is that THE only thing that propels markets? Well, first of all there are real, time specific drivers for the markets. At the close of 2018, if you can even remember that far back, markets tanked leading up to Christmas. Global trade was seizing up, the US was in a trade war with China and was threatening to start one with the EU, which was losing one of its most important members, the Brexit-ing UK. The economic expansion that occurred in the wake of the Global Financial Crisis was soon-becoming the longest in history and was, according to many economists, a bit long in the tooth. The Fed was raising rates and reducing its balance sheet by selling bonds. Stocks were down some -15% from the beginning of September through Christmas. Talk about a lump of coal in your stocking. But then Chairman Powell had a change of heart and became a dove almost overnight, promising support for the slowing economy. That promise of stimulus sent the markets higher, though they only recovered about +7% through the end of the year. That Christmas spirit continued and carried the markets through the summer when escalating tensions between the US and China slowed the rally. The Fed stepped in, lowering rates… as promised… helping to buoy the market. In December, the Trump Administration finally reached the Phase One trade agreement with China, ending what appeared to be a disastrous stalemate. That became the driver of the final rally into 2020… this currently exiting year. Christmas spirit? Perhaps, but a trade deal and a dovish Fed certainly helped the case. Back to this year… one in which we could all use some uplifting spirit to turn the page to 2021. Of course, a vaccine and a $900 billion stimulus plan… and a Brexit deal (finally) would surely help. Now, I don’t want to take the magic out of the Santa Rally, but these things have a way of occurring in the final moments of years past, at least the past few. There is something else I need to mention. Another time honored Wall Street tradition known as: Window Dressing. That occurs as portfolio managers, traders, funds, and even individuals clean up their portfolios in the last days of the year. The logic is to dress up the portfolio to look its best for the new year. Professional managers who want their portfolios to look good when it is reported in a snapshot on the turn of the year will typically pair down their losers and add to their winners. They may even get involved in some new positions which look more promising. The end result of this very real occurrence is that winning stocks tend to get lift while disappointing ones tend to lag through the year end. There is another reality that drives the window dressing philosophy: taxes. Investors of all ilk tend to lock in tax losses in December. Losing stock positions, usually under performers, are sold, putting more pressure on those stocks. The proceeds of those sales go into, you guessed it, winning stocks, helping to further uplift them. Spirit? For sure, though it is a toss-up between holiday spirits and animal spirits.
THE MARKETS
Stocks rallied to new highs yesterday on news that the President signed a $900 billion stimulus bill over the weekend. The S&P500 rose by +0.87% to a fresh high, the Dow Jones Industrial Average climbed by +0.68% to a new high, the Russell 2000 Index slipped by -0.38%, and the Nasdaq Composite Index added +0.74%, also a new high for the index. Bonds also climbed and 10-year treasury yields were flat at 0.92%.
NXT UP
- Case-Shiller Housing Price Index (Oct) is expected to have increased by +1.00% after rising by +1.27% in the prior month.
- The Treasury will sell $59 billion 7-year notes.