Week Ahead: Stocks looking for a Santa Rally

After a stellar year, US stocks are hoping to get some festive cheer in the shape of a Santa rally. While the Magnificent Seven have taken all the plaudits and pushed the major indices to (near)record highs, encouragingly the market breadth has broadened in recent months. In general, the greater the number of stocks that are helping push the overall market higher, the more support the market has.

December has historically been a favourable month for US stocks. According to Dow Jones, the S&P 500 has ended higher in December more often than any other month. In fact, since 1950, the last week of December and the first two trading days of the new year have produced a positive return for the S&P 500 nearly 79% of the time. That is the true meaning of a Santa rally and the bullish momentum in US stock indices still appears to be strong, if a little overbought.

The dollar has broken down to new multi-month lows with prices last seen in August. We are mindful of month end and year end flows, as well as much less liquidity in the market around this holiday period. A softer than expected inflation report but much stronger durable goods data on Friday saw the dollar try to cling to support around 102. But bearish momentum is strong and the next level on the Dollar Index chart is a minor Fib level of the summer rally at 101.24. There is currently a 15% chance of a rate cut at the first FOMC meeting of the year in late January, which rises to above 80% at its mid-March decision.

There is little on the calendar in a holiday-shortened week. But some yen watchers may be checking out a speech on Monday by BoJ Governor Ueda. Tuesday’s Japan employment data for November and Wednesday’s summary of opinions from the latest BoJ meeting will also be worth monitoring.

The BoJ kept policy and its dovish guidance unchanged in December and pushed back against the notion that it will begin tightening soon. But it did note that inflation is likely to remain above 2% through 2024. Markets currently assign an 80% probability for the BoJ to exit negative interest rates in April, which is when the springtime wage negotiations will conclude. Next week’s events could shape this pricing and be a driver for the yen.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.