If you’ve got money in the market, it probably feels like Christmas has come early this year. The S&P 500 hit a new all-time high of 3,154.26 on Nov. 27, and it’s hovering just below that level today.
The small-cap stocks of the Russell 2000 are finally breaking up to new 52-week highs, and longer-term bond yields are slowly trending higher.
However, a jolly, rotund fellow in a red suit hasn’t been driving this rally. Instead, strong economic numbers in the United States and the possibility of a trade agreement are behind the holiday magic.
The question is … with stocks already moving as high as they have, can a Santa Claus rally push them even higher?
Before we answer this question, we need to clear up a few things.
What Is a Santa Claus Rally?
We’ve got to define what we mean by “Santa Claus rally.”
The term “Santa Claus rally” was first coined by market analyst Yale Hirsch in 1972 in The Stock Trader’s Almanac. As originally defined, Santa Claus rallies occur during the last five trading days of the old year and the first two trading days of the new year.
The performance of the market during these trading days is used as an indicator of how well the market is likely to do in the next year.
According to Jeff Hirsch, Yale Hirsch’s son, a strong performance during this period can be a good sign for the market. But “If Santa Claus should fail to call, bears may come to Broad and Wall” — the location of the New York Stock Exchange.
However, since 1972, many analysts and commentators have been using the term “Santa Claus rally” to cover the period from the beginning of December
— or even as early as Black Friday — until Christmas. Apparently, they didn’t get the memo from Hirsch.
So, which definition do we prefer?
With all due respect to Hirsch, we’re going to stick with the new definition of the “Santa Claus rally” for two reasons.
First, we don’t think you can know with any degree of certainty how well the stock market is going to do during a given year by watching the performance of the market during a span of seven trading days.
Second, the impact of the economic forces most closely tied with Santa Claus — shopping, shopping and more shopping — is felt on Wall Street before Christmas, not after.
Can Santa Still Rally the Market?
The short answer to the question “Can Santa still rally the market?” is “yes.”
For the long answer, let’s start by looking at the chain reaction that typically leads to such a rally on Wall Street.
Retail stocks are often the ignition switch that starts the chain reaction. Nearly 70% of the gross domestic product in the U.S. is driven by consumers.
If consumers are confident in their financial future, they tend to spend more. If consumers are concerned about their financial future, they tend to spend less.
At no time is this more apparent than during the holiday shopping season. This is the time of year when retailers tend to make the majority of their profits. If consumers show up and spend lots and lots of money to play Santa, retail stocks tend to rise.
This sends a signal to the rest of the market that consumers are confident and that economic growth in the U.S. should be strong. This then leads to other stocks in the market doing well with the expectation of a strong GDP, and voila, a Santa Claus rally.
Watching Retail Stocks
So, let’s take a look at some retail stocks and see how they’re doing.
Interestingly, even though Santa is most likely to be found at the mall, the mall’s high-end anchor retailers — like Nordstrom (NYSE:JWN) and Macy’s (NYSE:M) — aren’t the ones who are feeling the most Christmas cheer on Wall Street.
You can see the difference in performance for 2019 by looking at the comparison chart above.
Looking at the chart, you can see that JWN and M have been falling for most of 2019. TGT and COST have been climbing.
However, if you look at the performance of all four stocks during the last few months, you’ll see that TGT, COST and JWN have all been climbing higher since late August. M has even stabilized. This is a good sign.
The rebounds and stabilization show that consumers are shopping. If they keep shopping through the holiday season, traders are likely to keep pushing stock prices higher across the market in anticipation of stable economic growth during 2020.
The Bottom Line
Wall Street is keeping a vigilant eye on trade talks. A few months ago, President Donald Trump’s administration threatened to slap new tariffs on additional Chinese goods on Dec. 15, but it looks like that deadline may get extended.
The Democrats in the House of Representatives gave traders something else to smile about on Tuesday. They announced their support for the new trade agreement between the United States, Mexico and Canada — the United States-Mexico-Canada Agreement.
Of course, they also announced two articles of impeachment against Trump, but Wall Street hasn’t seemed to care about the impeachment proceedings.
We expect more bullish momentum through the end of 2019.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it. John & Wade do not own the aforementioned securities.