Omicron and tapering cannot stop the Santa Claus rally, which came a week early on Wall Street this year, sending major equity averages sharply higher.
The Santa Claus rally usually takes place in the last week of December and the first week of the new year, when major equity averages post significant gains due to several factors.
One of them is end-of-the-year bonuses followed by the beginning of the year new money flows, boosting the buying power of individual and institutional investors.
Then corporate news is absent, which eases market volatility.
And there's the relaxed holiday atmosphere, which creates a positive sentiment among retail traders and investors, chasing after momentum stocks. These investors tend to be more sentiment-driven than fundamental-driven, as with institutional investors, who have already folded the books before Christmas and take a vacation.
But this year, the Santa Claus rally came early, in the three trading days before Christmas. On Thursday, the Dow Jones Industrial Average rose 0.55% or 197 points, the Nasdaq Composite rose 0.85% or 131.48 points, while the S&P 500 rose 0.6% or 29 points, reaching a new record high in 2021. Thursday's big rally in U.S. equities followed a strong rally in the previous two sessions, which ended a correction that began during the previous week.
The big rally in U.S. equities came despite several headwinds, like the spread of the Omicron variant of Covid-19 and the release of new data by the government, which show that the American economy is cooling off. On Wednesday, for instance, the U.S. government reported that the Gross Domestic Product grew at an annual rate of 2.3% in the third quarter of 2021, down from 6.7% in the second quarter, led by the easing in consumer spending.
Then there's tapering, the Fed's rolling back of its bond-buying program, which is ending the flow of new money from the central bank to the economy. When combined with the spread of Omicron, tapering could slow down the economy, further hurting the profitability of listed firms.
What's Wall Street is celebrating that Main Street is missing? A couple of things.
One of them is bargain hunting. After several days of sharp sell-off, the market was ripe for a technical rebound. "The recent market correction that began in early November has been "stealth" like," James E. Demmert, Founder-Managing Partner Main Street Research, said early in the week.
"Although indexes have dropped just 6%, many stocks are down 10, 20 and 30% - particularly those that were trading at significantly high price-earnings multiples. Many parts of the markets are now quite oversold and investor sentiment has become quite negative. We think that this is a great set up for many large institutional money managers to "buy the dip" before the year closes out."
Then there's Wall Street's nature to discount well-anticipated events, meaning that traders and equity prices factored in all the negative effects of both Omicron and tapering.
"The emergence of the Omicron variant coincides with the previously announced tapering of bond purchases by the U.S. Federal Reserve," says Steven Saunders is a Director, Portfolio Advisor with Round Table Wealth Management.
“As a result, the market understands it is likely that any negative economic impact brought on by the new variant will likely not be met with easier monetary policy, a point that Chairman Powell reiterated as he could see the case for increasing the pace of tapering in the months ahead despite news of the Omicron variant."
Thus, the correction in equities last week, which set up the stage for a rebound.
"However, the concern that the market will need rescuing is overdone, and there has been a lot of 'sell now, ask questions later,'" Saunders said.
"The new variant has not materially derailed economic growth, and the actual impact of it is undetermined in terms of vaccine efficacy and severity, so the worst-case scenario is likely being reflected in asset prices over the last week. We see this variant as another bump in the road of economic recovery but not one that would warrant a market correction or a shift in portfolio allocations."
And indeed, not one that could shatter the long tradition of the Santa Claus rally.
