A ‘Santa Rally’ Might Not Happen This Year for the Stock Market

Father Christmas on a visit to London in 1950. Stocks might get a lump of coal this year.

William Vanderson/Fox Photos/Hulton Archive/Getty Images

The Santa Clause rally that shows up in many a December might take a hiatus this year.

Reasons start with the fact that the S&P 500 jumped 10.9% in November. That was the 22nd-best month for the S&P ever, and it was the second-best November in history—attributable in large part to biotech companies reporting that they were seeing close to 100% efficacy on their Covid-19 vaccines. In addition, a second fiscal-stimulus bill began to look increasingly likely this year, not next.

In an average December, the S&P 500 rises 1.3%, according to Yardeni Research. That is higher than the average monthly gain of 0.64%. And the index rose in 67 of the 92 Decembers Yardeni observed. That is the highest frequency of gains of any month.

This December might be a different story. Roughly 76% of S&P 500 components are trading above their 50-day moving averages. Canaccord Genuity Strategists say the index is in “extreme overbought” territory.

“Expect [a] tactical near-term correction,” Tony Dwyer, chief market strategist at Canaccord Genuity, wrote in a note. Dwyer said in an interview he doesn’t think there will be a technical correction, in which stocks move down 10% or more, but rather a downtick of several percentage points.

Others agree. “Headline risk will be elevated over the next few days,” Dennis DeBusschere, head of portfolio strategy research at Evercore, wrote in a note. “Expect some consolidation in risk assets into year-end ahead.”

Already, December’s gains may be tapped out. The S&P 500 is up 1.7% for the month and is down almost 1% since Dec. 4.

The fundamental risks DeBusschere was citing are cropping up. Investors are expecting billions of doses of vaccines to be distributed in 2021, which means much of the upside of that for stocks has been realized, while any distribution bottlenecks present downside risks.

Investors also expect fiscal stimulus to happen soon, but if a deal doesn’t happen by February, stocks would react negatively, Jeff Mills, chief investment officer at Bryn Mawr Trust Wealth Management, said. The fiscal stimulus bill, which looks to be progressing toward passage, would provide cash to small businesses and households to tide them over until pandemic restrictions can be eased or lifted.

Consistent with the statistics that show the market might need a breather, fund managers are getting close to fully invested. Hedge funds’ long exposure to stocks recently hit its 75th percentile historically and institutional fund managers surveyed by Bank of America are holding an average of 4% of their portfolio’s in cash, an allocation that has dropped steadily throughout the year from 6% in March. This, according to Bank of America, is “sell signal” and historically indicates the S&P 500 will drop 3.2% in the next month.

For stock gains in the near-term, investors need a new and surprising catalyst. Longer-term, many are bullish.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com