Market Commentary

Weekly commentary on recent stock market action, with a particular focus on technical analysis.

November 30, 2016

Scott Wren, Senior Global Equity Strategist

Santa Claus Rally Is Early This Year

  • Stocks have rallied nicely off their election-night lows as investors have chosen to focus on the fundamental outlook over the next 6-12 months.

What it may mean for investors

  • The "Santa Claus" rally appears to be coming early this year. Stocks are now within the lower bounds of our "fair value" range. Stay invested.

Over the course of the last week, as the S&P 500 has continued to crawl higher into record territory, investors have begun to hear the rumblings. The financial news cable channels are starting to ask the question. Web sites and newspapers are bringing it up. It happens every year, but it is starting a little earlier this time around. And normally it doesn’t matter how the stock market has performed over the prior 11 months. Whether the market has been naughty or nice really doesn’t seem to make a difference. Every year stock investors are forced to ponder the question of whether there will be a “Santa Claus rally” to finish out the year.

Technically, the “official” time slot for a Santa Claus rally is the week of trading between Christmas and New Year’s Day. But hey, this strategist likes the entire holiday season starting with Thanksgiving, so my Santa rally time frame is a bit more extended. Our Equity Strategy group doesn’t mind throwing a market party for the entire month of December if at all possible. And that certainly has happened often in the past. December, historically, is one of the strongest months for stock market performance looking back over the past 60 years. In fact, the three-month period from November 1 through the end of January has historically been very good for equities.

But we also like to look at the fundamentals and valuations before getting all hyped up on holiday cheer. OK, this strategist admits that may sound a bit like Ebenezer Scrooge, but sometimes all that holiday cheer needs a shot of reality to go along with the eggnog. And this might be one of those times. The equity road has been rocky from time to time this year, but it might be time to step back a little and look at what the market has done. At the time of this writing, the S&P 500 is up eight percent on the year, excluding dividends. Not too shabby in our opinion.

But do we really want to step in front of this freight train, or rather this gift-laden sleigh, and say the rally may be close to being over for this year? Could we get run over by Santa and his reindeer? Yes, it could happen. What we can say is that based on our analysis the S&P 500 appears to be trading just inside the lower end of what we would consider a “fair value” zone for this point in time.

Do we look for higher stock prices in the coming six or eight months? Yes, we do. We continue to believe the S&P 500 can trade toward or even just a bit beyond the top end of our 2190-2290 year-end 2017 target range somewhere in the middle portion of next year. That would represent a good return over that time frame, in our opinion.

The S&P 500 has rallied more than nine percent from the election-night panic low on November 8. This is an impressive feat over a three-week time frame and one that should make investors happy. The month of December lies ahead, and we encourage our readers to enjoy the remainder of the holiday season. It looks like Santa Claus is early this year.

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