Investors have grown used to Saint Nicholas leaving an extra present under their trees at the end of the year, and in 2019 the so-called Santa-Claus rally could power the major benchmarks to record-setting gains once more.
The Santa Claus rally is Wall Street’s nickname for the unusually strong stock-market gains typically seen during the final five trading days of the year and the first two trading days of the following year.
Since 1950, the S&P 500 index SPX, -0.40% has gained an average of 1.3% during this stretch, about six-and-a-half times the average seven-day rolling performance of 0.2%, according to Dow Jones Market Data. For the Dow Jones Industrial Average DJIA, -0.40% , the average return is a touch better during this stretch at 1.4%.
Despite last December’s brutal stock market rout — when the S&P 500 lost 9.1% — the final month of the year is typically a good one for stocks, the third best on average for the S&P and the second best for the Dow.
And given the healthy gains the benchmarks have seen year-to-date, a strong showing in December could power these indexes to calendar-year gains that are stronger than those seen in 2013, making 2019 the best year for stocks since the late 1990s.
Risks remain however.
Chief among them U.S.-China trade tensions, which could boil over with the Trump Administration currently on track to implement new 15% import tariffs on $160 million in Chinese imports on Dec. 15th. Analysts said that they expect these duties to be avoided, given recent optimistic commentary from both sides of the standoff, but they remain potential roadblock to further gains, as do any new evidence that ongoing struggles in the global manufacturing sector threaten the broader U.S. economy.
“December has historically been a strong month for stocks,” Lindsey Bell, chief investment strategist at Ally told MarketWatch. “Barring an exogenous shock like a Fed rate hike or trade news, December should repeat this pattern.”
Bell said that the month of December in general, and the seven-day Santa Claus-rally period in particular, usually sees strong gains because many investors are receiving bonuses, “so there’s a little extra cash in the market.” Meanwhile, "People are in a good mood, shopping and spending and thinking about the holiday period, not focusing on selling stock,” she said.
So far this year, the S&P has gained 25.3% year-to-date, putting it on track for its best annual showing since 2013, when it rose 29.6%. For it to surpass that year’s performance, the S&P 500 would have to gain 3.5% in December, a performance the index has matched or beaten in November, June, April and January of this year. If the S&P 500 can achieve this feat, 2019 would be the best year for the index since way back in 1997, when it rose 31%.
Meanwhile the Dow has gained 20.3% so far this year, also its best since 2013, when it rose 26.5%. The blue-chip index would have to add 5.2% in December to beat that performance, a tougher task. The Dow last gained that much in January, when it rose 7.2%. If it does manage to pull it off, 2019 would be the best year for the Dow since 1995, when it rose 31%.
Ryan Detrick, senior market strategist at LPL Financial, noted that one reason to believe the stock market may achieve these lofty performances is that the S&P 500 tends to have a good month of December during years of overall strong performance. “The past 7 of 8 times when the S&P 500 has been up more than 20% through November, December gains have been positive,” he said. “When the market does well the first 11 months, we tend to sprint into the end of the year.”
Even if the Dow and S&P aren’t able to beat 2013’s stellar returns, Jack Janasiewicz, portfolio manager at Natixis Advisors expects December to be another strong month for stocks. “We think the market grinds higher into year end,” he said. “If you look at sentiment indicators and based on conversations with clients, they are getting better, but not euphoric.”
Janasiewicz said that while the S&P 500 is priced somewhat expensively at 18 times forward earnings, a historically healthy consumer and good wage growth should help maintain economic growth in 2020 and drive corporate earnings growth, justifying the market moving higher. “If consumption growth holds at 2.5%, there’s no reason the economy can’t grow at about 2%,” he said. “That can easily translate to 5% to 7% earnings growth next year.”
The variable that may determine the market’s performance in December is the ongoing U.S.-China trade negotiations. With the U.S. set on Dec. 15 to add new tariffs of 15% on the final $160 billion in Chinese imports that have so far avoided new taxes, the stage is set for a potentially serious escalation of tensions or the signing of a long-promised “phase-one” trade deal that could raise expectations for global economic growth in the quarters ahead. “We could see a take-off if that phase one trade deal is signed,” Bell argued.
Given recent market gains, Janasiewicz said, even a delay of the Dec. 15 tariffs, along with continued assurances of progress toward a deal, could help power the market higher. “We’ve already done okay without significant progress on trade, helped by central banks around the world cutting interest rates.”
The coming week will feature a series of U.S. data releases that could confirm the theory that market watchers have overestimated the impact of new tariffs, foremost among them will be the Institute for Supply Management’s and Markit’s manufacturing indexes, due Monday morning. Investors will also get a reading of U.S. construction spending in October that day.
On Wednesday, ISM and Markit will issue their indexes of the U.S. services sector and payroll firm ADP will issue its estimate of private-sector job growth for the month of November, while Thursday will feature data on weekly jobless claims and October factory orders.
The headliner will come Friday, when the Labor Department will issue its estimate of U.S. job growth for the month of November, which investors will be watching for signs that the U.S. consumer can maintain the sort of strength that has recently powered the U.S. economy amid weak business investment.
On the earnings front, tech firms Salesforce.com Inc. CRM, +0.85% and Workday Inc. WDAY, -0.31% will issue earnings Tuesday, along with AutoZone Inc. AZO, -0.42%. Wednesday will feature Campbell Soup Co.’s CPB, -1.04% third-quarter performance release, and on Thursday retailers Dollar General Corp. DG, -0.67% and Tiffany & Co. TIF, +0.21% will report.