Stocks Gets Head Start on Santa Claus Rally With Fed Gift

Markets Need a Fed Heads Up on Rate Hiking Path
  • Decembers bring 1.4 percent average gain dating back to 1928
  • One bull sees S&P closing 2015 at 2,250, an 8.2% December gain

Investors waiting for an end-of-year rally just got a present from Janet Yellen.

The Standard & Poor’s 500 Index began the second half of December with gains that nearly wiped out its loss for the month, setting it up to close out the year in positive territory with 10 trading sessions to go. The 1.5 percent increase Wednesday nearly equaled the gauge’s average advance in the last two weeks of the year since 1995. The benchmark slipped 0.2 percent as of 9:59 a.m. in New York.

Historically, the bulk of December gains arrive around the same time as Santa Claus and last through the end of the year. For the same thing to happen in 2015, investors will have to remain at peace with the first rate hike in more than nine years and navigate concerns ranging from a rout in commodities to stress in junk bonds.

Getting the first tightening out of the way is enough to give the market a boost into the end of the year, said Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business.

“It seems as if this Santa Claus rally started this week on anticipation of this move,” said Arone, whose firm oversees $2.4 trillion. “There’s not much in the way of major news for next week and the following, so I can see us rallying into the end of the year on low volumes.” 

The market could even get close to the index’s record set in May, he said. “It wouldn’t surprise me if we got near the 2,130 mark into the end of the year.”

In a year that’s seen major monthly stock swings -- October and February delivered two of the biggest gains in the past four years, while August was the worst since 2011 -- the benchmark gauge has gone virtually nowhere. For that to change, December will have to live up to its historical reputation as the second-best month behind July. The S&P 500 has rallied an average of 1.4 percent during the year’s final month, with gains in 65 of the last 87 Decembers.

Investors spooked by the cheapest oil prices in six years and signs of weakness on high-yield credit markets may have been caught under-invested in equities before the Fed’s move, said Andrew Brenner, head of international fixed income for National Alliance Capital Markets in New York. Attempts to realign into stocks may help fuel a year-end rally.

“I think we’ll be OK between now and the end of the year,” Brenner said. “Markets react more to positions being out of sync than they do with economic numbers or even central banks.”

For every tempered bull, there’s a raging one. Brian Belski, chief investment strategist of BMO Capital Markets Corp., hasn’t backed down from an “extremely” out-of-consensus end-of-year target for the S&P 500: a record 2,250. Such a level would mean the benchmark gauge needs to end the month 8.2 percent higher than where it started. It’s rallied that much in only two prior Decembers, 1971 and 1991.

Even so, oil poses the primary risk to any year-end market exuberance, Arone said. Crude slumped 4.9 percent Wednesday after U.S. inventories climbed to the highest level for this time of year since 1930. “Despite all the good news today, oil did suffer, so we’ll have to keep an eye on that in terms of its impact.”

There’s also lingering skepticism about the strength of the economy, which could weigh on the market, according to Leo Grohowski, who helps manage more than $184 billion in client assets as chief investment officer of BNY Mellon Wealth Management in New York. “The market should perform well after raising rates, but normally the economy is on better, more confident footing.”

Still, the combination of a market that’s recently been under pressure, along with the collective sigh of relief from the rate hike and “a lot of dry powder out there” increases the likelihood of a year-end rally, Grohowski said. “I’d be a buyer before I’d be a seller going into year-end.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE