How high will the Santa Claus Rally Go

Is a Santa Claus Rally going to drive the market? Major indices logged modest gains for the week after the Federal Reserve signaled loose monetary policy was likely to stay until at least 2023. Digesting the developments over the latest coronavirus relief package will drive price action early in the shortened week. Markets are closed on Friday in observation for Christmas, and Thursday’s session will be abbreviated.

Past Week

Option trading volatility produced mild selling pressure into the weekend. However, major indices and government bond yields still logged modest gains for the week. Gains stem from the Federal Reserve signaling loose monetary policy was likely to stay until at least 2023. Ten of 11 S&P 500 sectors finished higher, paced by technology, consumer discretionary, and materials. Energy was the lone sector in the red despite crude oil prices rising sharply. Whether it be the rising COVID-19 case count or profit-taking, the rotation from growth to value took a breather as the former outpaced the latter by around 4%.

On the economic data front, investors were disappointed by November U.S. retail sales falling 1.1%. To put things into perspective, Retail Sales are up 4.1% on a year-over-year basis. This illustrates the impressive strength of the U.S. consumer, especially during a pandemic. The latest domestic PMIs eased from multi-month highs but remained firmly in expansionary territory. New orders continued to rise, but inflationary tones are palpable as significant supply chain disruptions led to an unprecedented rise in prices. Output expectations reached a 32-month high, largely driven by vaccine optimism.

New relief is close. Indications are for a $900 Billion dollar package. Last Thursday’s unemployment claims increase to 885,000, higher than anticipated. Markets seemed to be anticipating that Congress would pass aid as more Americans are requesting unemployment benefits. Weekly initial unemployment claims peaked this March at nearly 7 million. While they steadily fell into the summer there has been a recent uptick in claims as 2020 draws to a close. The Fed left rates unchanged last week. The Fed purchasing bonds will stay the same.

This Week

Digesting the agreement reached over the latest $900 billion coronavirus relief package will drive price action in the shortened week. The contentious dispute over the Fed’s lending abilities is likely to make bipartisan efforts more difficult if the economic situation materially deteriorates at some point in the year ahead. Still, investors should be aware of a potentially friendly bout of seasonality. That aside, investors will dissect a few tier 1 economic reports amid expectations for lower levels of liquidity given the holiday. Reports on consumer confidence tomorrow are expected to improve. The durable goods report offers insight into firms’ demand for longer lasting goods.

According to the recent Bank of America survey, fund managers are looking for companies to expand their capex purchases in 2021. Unemployment claims are expected to remain flat. Economists expect personal spending to retreat slightly. Reports are circulating that a new strain of coronavirus is spreading across Europe, especially in the UK, prompting air travel restrictions from the country. Given the frothy sentiment across financial markets, this development warrants investors’ attention in case the situation deteriorates further.

Year-to-date index performance; Dow up 5.7%, S&P up 14.8%, and Nasdaq up 42.2% through the close on Friday.

Have a safe and wonderful holiday season!

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