Is a Santa Claus Rally in the Cards?

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The Federal Reserve pushed the button on hiking interest rates this week, finally releasing the tension that has stretched the market thin over the past few months. Investors who have been pulling out their hair at Fed Chair Janet Yellen’s indecision can now turn their attention elsewhere as we inch closer to the end of this roller coaster of a year.

Best stocks to buy for a santa claus rally

Overall, the market seemed to breathe a sigh of relief following the announcement, with each of the major indices closing up well over 1%. Any catalyst creates winners and losers, and now that the Fed has made a move, we’ll see money rush into some long-neglected themes and out of others that have prospered over the grand arc of zero interest rates. Fortunately, the start of a rate cycle rarely means disaster for the markets, which bodes well for the Santa Claus rally we’ve all been hoping for.

At worst, if Santa isn’t feeling particularly generous this year, we could see more volatility in the coming weeks. With the Fed now out of the way, other market concerns will shuffle back to the forefront, like the on-going oil glut, troubling economic trends overseas and the recent scare from high-yield bond rates. We’ll have to keep a close eye on these issues over the coming months, but in the short term I think the Fed’s optimism about the economy will leak into stock prices, outweighing many fear factors that might drag on the indices as we near Christmas.

Santa Has Been Generous in the Past

We have seasonal trends on our side, too. Across all major market sectors and investment styles, December is generally a winning month. In fact, for small-cap stocks across the board it’s often the best month of the year, with the last five trading days of December and the first two of January typically among the strongest.

Looking backward, the Russell 2000 has risen an average of 2.7% in December since 1999. This time around, we’re still down 3.4% so far, which means there’s an awful lot of catching up to do in the next two weeks, but stranger things have happened. In 2009 and 2010, December gave the small-caps gifts of 7.9%-8.0% pops, and even in the gloomy December of 2008, small-cap stocks bounced back 4.8% in the course of a month, so the historical precedent is there.

I’ll leave you with this thought to chew over: generally speaking, stocks are not expensive right now. A select few are very rich, but most are closer to the undervalued side. With the Fed’s newly-restored confidence in the market, there is a lot of headroom for many names to move higher — like growth themes, which have the potential to climb 4%-7% on average next quarter. I think we’ll likely end the year on a high note, and I have a hunch that the strength will carry over into the first few weeks of the new year as well.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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