13.12.2021 – Here’s how it can happen: The S&P 500 has risen to lofty heights despite horrendous U.S. inflation. Yet many investors were afraid of the Federal Reserve’s tapering. The fact that the Dow Jones, Nasdaq and also the DAX are rather lagging behind shows that traders are not yet in complete agreement. We highlight the pros and cons of a year-end rally.
Consistently strong December
First, let’s take a look back: According to the U.S. investment firm LPL Financial, the term Santa Rally dates back to 1972, when Yale Hirsch published the Stock Trader’s Almanac. And today? Let’s let a British expert have his say: Capital.com recently quoted Jason Hollands, managing director of Bestinvest in London. In his opinion, there is “compelling evidence” for the closing spurt: “Looking at 40 years of monthly market data, December has the highest incidence of any month in providing investors with positive returns both globally and in the UK.” Globally, equities delivered positive returns 80 percent of the time, he said.
Investment bank Schroders is also following suit: U.S. equities have delivered positive returns 77.9 percent of the time in December since 1926, according to Morningstar Direct data. Even if it was only plus 1.6 percent on average – but that’s what leveraged products like CFDs are for. Schroder, of course, qualifies that looking back says nothing about the future – and that things went quite differently in December 2018.
Either way, the Santa rally is one of the most persistent myths on Wall Street. Especially since fund managers like to stock up on winning stocks when window dressing at the end of the year so they don’t have to be told they missed the best price rockets.
Steep inflation in the U.S.
But isn’t everything different this time? Just now, inflation in America offered a bearish argument for the Federal Reserve’s tapering – that is, scaling back bond purchases and possibly even raising interest rates. Tagesschau.de reported, “Inflation in the U.S. climbed to 6.8 percent in November, the highest level since June 1982. Economists had expected this boost after inflation hit 6.2 percent in October. Supply problems, material shortages and skyrocketing energy costs are the cause of the inflation.”
What the hacks forgot: Money supply is a key factor behind inflation. And indeed, after Friday’s numbers, speculation was already circulating again about whether the Federal Reserve and the other central banks can even curb the flood of money without risking a systemic collapse. Especially since the omicron variant also speaks in favor of new government programs. So, as is often the case, a negative factor in the real economy would be a boost for the stock market.
Masses of capital waiting
Be that as it may, there is plenty of money waiting on the sidelines. Here are two appropriate reports from the “Wall Street Journal”: In November, the inflow of capital into exchange-traded funds exceeded $1 trillion for the first time. According to data from fund rating company Morningstar, the total was $735 billion worldwide a year earlier. And according to data from S&P Dow Jones Indices, firms in the S&P 500 bought back about $235 billion in shares in the third quarter – putting the new record above the previous high of $223 billion set in the fourth quarter of 2018.
Our conclusion: the masses of cash would indeed argue for a year-end price run; especially as Omikron counters the inflation factor. We hope we have been able to provide you with some clarity on this mixed bag. Whether long or short – Bernstein Bank wishes you good luck!
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