Over the last few decades, investors’ timeframes have shrunk. They’ve become obsessed with quarterly returns. In fact, technology now enables them to become distracted by returns on a daily basis, and even minute-by-minute. Thus one way to gain an advantage is by ignoring the ‘noise’ created by the manic swings of others and focusing on the things that matter in the long term. – Howard Marks
Stocks fell on Monday as Omicron fears gripped the markets but the major stock averages all rebounded strongly to end the week with sizable gains. The technology-heavy Nasdaq Composite Index was the best performer with a gain of over 3% while the S&P 500 Index added more than 2% to close at an all-time high in the holiday-shortened week. With the more contagious Omicron variant spreading in nearly every state and more than 90 countries, there was increased uncertainty on whether the rise in cases would bring new widespread shutdowns that could negatively impact the economy. While the Omicron surge accounted for nearly 75% of new infections last week, the variant has a lower risk of hospitalization than other Covid variants and much milder symptoms for those who have been vaccinated. Investors have been trained to buy the dip in stock prices, though, and the rally last week coincided with news that the Food and Drug Administration (FDA) granted emergency use authorization for antiviral drugs to treat Covid-19 from pharmaceutical manufacturers Pfizer and Merck. The stock market also received a boost from the November leading economic indicators, which jumped more than one percent after a big increase in October, suggesting that the economic expansion will continue over the near term. The market typically rallies at the end of the year and it appears that Santa Claus has arrived once again to spread holiday cheer.
In addition to the strong reading for leading economic indicators, all of the other economic data released last week was also favorable. Third quarter gross domestic product (GDP) growth was revised higher to 2.3% from 2.1% and durable goods orders in November were much better than expected. The core personal consumption expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, was in line with expectations with a year-over-year rise of 4.7%. New home sales in November jumped to a 7-month high, underscoring strong demand for housing with mortgage rates near historic lows, and existing home sales increased for the third straight month. Consumer confidence increased in December from November and was better than forecast.
Fortunately, Democratic Senator Joe Manchin said that he would not support the $2 trillion Build Back Better spending bill that would have almost certainly increased already high inflation and added to the huge federal budget deficit.
For the week, the Dow Jones Industrial Average rose 1.7% to close at 35,950 while the S&P 500 Index gained 2.3% to close at 4,725, a record high. The Nasdaq Composite Index jumped 3.2% to close at 15,653.
The Chicago Purchasing Manager’s Index (PMI) for December is expected to be the same as in November with a reading above 60, marking the 17th consecutive month it has been above 50, the threshold for expansion. The Case-Shiller Home Price Index for October is expected to show that home prices increased 18.5% year-over-year, but slightly lower than the previous month.
The stock market will have regular trading hours on Friday New Year’s Eve but the fixed income markets will close early at 1 p.m. central time.
There are no prominent companies scheduled to report quarterly earnings this week.
The stock market appears to have positive momentum heading into the last week of the year and if history is a guide, stocks should add to their recent gains. The market likes certainty and although the spread of the Omicron variant and its potential effect on the economy is far from certain, we do know that its symptoms are relatively mild, especially for those who are vaccinated. Also, the FDA approved pills from Pfizer and Merck for the treatment of Covid-19 last week, providing people with another line of defense for the virus. With little in the way of important economic data this week and no corporate earnings reports of any significance, the stock market should continue its upward trend. The so-called Santa Claus rally period is generally defined as the last five trading days of the year and the first two of the new year. Records going all the way back to 1928 show that the S&P 500 has been positive during this time frame nearly 80% of the time. The S&P 500 has posted a total return of 27.5% through the close of business on December 23rd, a very strong year that historically gets even stronger to end the year. In the last 40 years, when the S&P 500 has returned over 20% going into the last five trading days of the year, the index invariably adds to those gains. Investors are also fairly certain about the Federal Reserve’s plans to become less accommodative and raise interest rates next year and seem comfortable with this course of action. Sentiment among investors has changed from seeing the glass half empty to seeing the glass half full, which should enable the stock market to finish the year on a positive note during this quiet final week of trading.