Will the Stock Market see a Christmas Rally?

The market is exceptionally long in the tooth. US large cap stocks, the S&P 500 sort, are particularly richly valued, and perhaps prime for a plunge.

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Stock market Christmas Eve
Investment fashion has simply shifted from risk-off fear, to risk-on greed. Source: Pexels.com

As I write this in the days around Thanksgiving, the stock market continues to surge to record highs, wave after wave, as if it will go on forever.

It won’t, of course, it never does. 

It is astonishing, though, and a great lesson on the fickle nature of short-term market behavior, which itself is really a lesson on human nature.

Just months ago, investors the world around gnashed their collective teeth, predicting more gloom and doom, recessions around the globe, troubled over a stock market so long in the teeth as to appear downright tusked. 

And just a year ago, we suffered a deep bear plunge, with the markets down nearly 20% before the bottom on December 26th.  Instead of a Santa Claus rally, we got a Christmas Crash.

This, of course, is the big reason the market’s up so much this year – it started pretty deep in the hole.

What a difference an attitude adjustment makes!

For besides the consensus balance between optimism (now tipped that way) and pessimism, not much in the world has changed. 

Investment fashion has simply shifted from risk-off fear, to risk-on greed.    

But that’s the way of the market. In the near term, it swings with the net mean mood. In the long term, the mood doesn’t matter.

For those of you still focused on the near term, there is much to beware. 

This market is exceptionally long in the tooth. US large cap stocks, the S&P 500 sort, are particularly richly valued, and perhaps prime for a plunge. 

The S&P 500 index SPX, +0.54% fell by 2.7% Monday, marking the first session before Christmas that the broad-market benchmark has booked a loss of 1% or greater — ever in 2018.

The following statistic has been confirmed by Dow Jones Market Data, which said the largest decline in the index on the trading day before Christmas was Dec. 23 in 1933. 


The Dow Jones Industrial Average DJIA, +0.42% finished down 653 points, or 2.9%, representing its worst decline on the session prior to Christmas in the 122-year-old blue-chip gauge’s history.

It wasn’t pretty for the Nasdaq Composite Index COMP, +0.34% either, with the technology and internet-laden benchmark logging a 2.2% loss. That also marked the worst Christmas Eve, or more aptly, worst drop on the trading session just before Christmas in its shorter history, with the next worst drop the 0.95% decline logged in 1973. The Nasdaq began trading on Feb. 8, 1971.

Related: Is US stocks Market Near to Crash?

Perhaps worse, we sit at the warmup of perhaps the most philosophically polar presidential election of all time. The views on public policy between the parties could not be more different. Impeachment proceedings leaven the explosive mixture. And the Bloomberg bomb has just entered the scene. 

For these reasons, and more, we are expecting yet another correction for US large caps, if only for reflex relief if nothing more. 

Further out, frothy valuations on many large caps, coupled with the specter of a Democratic tax bludgeoning of corporations and the highly productive wealthy, may signal outright bearish conditions around the corner.

Conclusion

This forecast, while unsettling, does bode well for our favorite style of investing, deep value US companies and beaten down non-US stocks.

We think both of these have very bright prospects for outperformance, even as the economic clouds gather.

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