Investors are closely watching the latest news on the rapidly spreading Omicron variant for signs of how much the virus could impact the U.S. economy and earnings as the market heads into what has historically been a strong time of year for equities.
Overall, the S&P 500 is slightly ahead since Nov. 24, prior to news of the variant hitting markets. It marked a record-high close on Thursday, as encouraging developments gave investors more ease about the economic impact of the variant.
“The market is extremely reactionary now and every little bit of news has a huge impact,” said George Young, a portfolio manager at Villere & Co. Young is planning on taking advantage of any Omicron-induced volatility to add to stocks that rely on tourism and travel such as bank company First Hawaiian Inc . Shares of the company are up 14.4% for the year to date.
The Omicron variant is causing infections to double in 1.5 to 3 days, according to the World Health Organization. The variant now accounts for 73% of all new U.S. cases, up from less than 1% at the beginning of the month.
Still, questions about Omicron’s virulence have made investors less pessimistic than the original reaction. The S&P 500 closed down 2.3% on Nov. 26 after the variant was discovered, on fears of fresh economic lockdowns.
A South African study offered hope about the severity of Omicron and the trend of COVID-19 infections on Wednesday. Shares of vaccine makers slumped in December as investors expect the Omicron variant’s impact to be limited based on recent data.
That bodes well for what is known in the market as a Santa Claus rally. Historically, U.S. stocks have risen during the last five trading days of December and the first two days of January in 56 out of 75 years since 1945, according to data from CFRA Research. This year, the time period starts on Dec. 27. The average Santa Claus rally has boosted the S&P 500 by 1.3% since 1969, according to the Stock Trader’s Almanac.
It is unclear to what extent Wall Street analysts expect Omicron to affect earnings and the economy. Estimated 2022 S&P 500 earnings growth was at 8.3% as of Friday, compared with 8.0% at the start of December, according to Refinitiv data.
Goldman Sachs cut its estimate for U.S. GDP growth to 3.8% from 4.2% due to the uncertainty of the impact of the Omicron wave.
POSSIBLE VOLATILITY
While there will likely be some economic impact from Omicron, U.S. consumer spending will likely remain strong, said Cliff Hodge, chief investment officer for Cornerstone Wealth.
He is focused on any signs that Senator Joe Manchin could reach an agreement to support President Joe Biden’s signature $1.75 trillion Build Back Better climate and social spending bill. Manchin, who would provide one of the key votes to pass the bill in a divided Senate, said on Sunday that he could not support the bill in its current form. Senate Majority Leader Chuck Schumer said that the Senate will vote on the bill in early January.
“We need a little bit of good news whether on the Manchin front or Omicron to get a rally going,” Hodge said. “We are fully invested and anticipate a little bit of a relief rally into January.”
The week ahead will be light on economic data, with the release of the S&P Case-Shiller U.S. home price index on Tuesday among the few notable data points.
The lack of new reads of the strength of the economy at a time when coronavirus case counts are rising may leave the stock market more volatile through the end of the year, said Dana D’Auria, co-chief investment officer of Envestnet PMC.
“The market has gotten pretty good at pricing in and leading off from what we are learning about on the health side,” she said.
Should Omicron cases continue to spike or there are signs that economic restrictions could be reimposed, investors will likely rebalance into the shares of giant technology companies such as Apple Inc that have emerged as defensive plays given their large cash positions and revenue growth as a result of remote work, D’Auria said.
“At the end of the day if Omicron really causes problems I would be ready for a more volatile market” well into the new year, she said.
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FAQs
Positive sentiments or seasonal optimism may prevail, contributing to a "Santa Claus rally," where markets tend to show strength or experience a modest increase in prices in the last few trading days of the year. However, this is not a guaranteed phenomenon and does not occur every year.
What is the Santa Claus rally in the stock market? ›
A Santa Claus rally is the tendency for the S&P 500 index to increase over the final five trading days of December and the first two trading days of January. The term was first coined in the 1970s in the Stock Trader's Almanac.
How consistent is the Santa Claus rally? ›
Data behind Santa Claus Rally
This pattern is not unique to the S&P 500; the Dow Jones Industrial Average also experiences a similar uplift, averaging a 1.38% increase during the holiday season, with a frequency of 79% since 1950. These statistics underscore the historical consistency of the rally.
What is the average gain of the Santa Claus rally? ›
CFRA found that in the years when a Santa Claus rally occurred, the average full-year gain for the index in the year that followed was 9.8%. That compared to an average gain of 8.9% for all years since 1945.
What is the best month to sell stocks? ›
Best Month to Sell Stocks
In fact, looking at the chart above of monthly average returns, September averages the worst in the calendar year. As a result, some traders believe that September is the best month to sell stocks.
What is the best month to buy stocks? ›
Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile. Historically, April, October, and November have been the best months to buy stocks, while September has shown the worst performance.
What is the best stock to buy before Christmas? ›
The 3 Best Christmas Stocks to Buy
- Lowe's (NYSE:LOW)
- Mondelez International (NASDAQ:MDLZ)
- PayPal Holdings (NASDAQ:PYPL)
- The Takeaway: Load Up on the Best Christmas Stocks to Buy.
Quick service meal and retail delivery companies that could see strong holiday results include Uber, GrubHub, and DoorDash. Just be careful of inflated share prices and risk in fast-growing companies that struggle to generate profits.
How long does a Santa Claus rally last? ›
The phenomenon, given its label by analyst and creator of the Stock Trader's Almanac Yale Hirsch, generally takes place during the last week of December into the first few days of January. In some years, the rally has taken place over an extended period, beginning Dec. 14 and lasting over two weeks.
What are the reasons for Santa Claus rally? ›
The Santa Claus rally is the tendency for the stock market to increase during the Christmas season. Theories for the rally include increased holiday shopping, seasonal spirit, and institutional investors settling their books before going on vacation.
In other words, if a Santa Claus rally occurs, the market is more likely to see gains, whether large or small, over the next year. If the market goes down when the Santa Claus rally is meant to occur, the market is more likely to fall over the following year.
Does the Santa Claus rally happen every year? ›
In fact, December has been the second-best month for the Dow Jones Industrial Average going back over 50 years. If you're not paying attention to the market during the holidays, you're leaving money on the table. What is the Santa Claus Rally? The market rallies in December roughly 3 out of every 4 years.
Is Santa Claus rally before or after Christmas? ›
In most years, the phenomenon lasts for just seven days, starting the day after Christmas and running until the second trading day of the new year. But if the holiday falls on a weekend, the rally may begin before or after Christmas.
What are the worst months for the stock market? ›
NYSE Composite Seasonal Patterns
- Best Months: April, July, October, November, and December.
- Worst Months: January, February, June, August, September.
Dubbed a Santa Claus rally, this phenomenon describes a tendency for the stock market to go up by 1% to 2% over the period spanning the last five trading days of the outgoing year and the first two trading days of the incoming one. Though not identified until 1972, the trend dates back to at least 1900.
Do stocks usually drop before Christmas? ›
Again, the theory says that stocks generally fall just prior to holidays because traders offload their holdings in order to avoid the risk of significant news appearing while the markets are closed. Longer-term investors who are willing to ride out any short-term negative news are rewarded with lower entry prices.
Do stocks normally go up in December? ›
Don't fear December: Stocks usually see year-end gains, especially before a presidential election year.
Do stocks usually go up or down in December? ›
Stocks usually see year-end gains in December for several reasons: Tax-loss selling: Investors may sell off underperforming stocks at the end of the year to realize capital losses for tax purposes. This can result in downward pressure on stock prices leading up to December.
Do stocks tend to go up or down in December? ›
December is generally a decent month for the stock market, but the following stocks have excelled in December over the last 15 years or more. Each stock on the list has rallied at least 4.5% on average, and has moved higher in the month at least 75% of the time.…
