2019/11/10 Commentary: ‘Santa’ already in town (redux)
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COMMENTARY: WEEKEND: November 10, 2019
‘Santa’ already in town (redux)
But is it Mr. Claus or someone else?
This year is a bit different than the end of last year (more so like 2017) in the context of just how upbeat the US equities performance has become into late year. Despite the overhang from the continuing US-China differences, it has been injected with steroids on the sense that those talks are continuing.
At the very least, any near term agreement will lead to the cancellation of the US tariffs increase that was supposed to be implemented into mid-December. The question over whether any 'Phase I' agreement amounts to nothing more than Donald Trump's need to 'declare victory and go home' remains (see Thursday's 'The Bank Overshadowed by US-China News' emailed research note for more.)
That this seems a bit more likely in the face of other pressures on Trump is moot in the near-term. The sight of him and Chinese President Xi signing any agreement will encourage thoughts of broader rapprochement to come; regardless of how far apart the two sides may remain on the more substantive critical issues.
However, US equities extended their rally into the end of last week despite first the Trump administration, and then the man himself, refuting Chinese claims that a broad tariffs rollback agreement had been agreed. So what could possibly be so influential as to overshadow the idea there are still stumbling blocks on the way to even the limited Phase I agreement? Well, in the context of the overall US equities strength finally extending late this year after stalling repeatedly against topping indications since July (see any recent research notes for more on that), there could already be a strong seasonal factor influencing the Evolutionary Trend View
The general psychology remains the same as any other strong year insofar as our long-standing views on the ‘Santa’ influence in the markets remains as always, yet based on something more than a jolly old guy in a red suit. In 2017 US tax reform certainly provided a plethora of blessings for US equities from multiple factors on the outlook into 2018. Of course, as the market is a ‘creature of expectations’, that is now being strongly reflected this year.
Whether or not the anticipated greater rapprochement between the US and China occurs, the anticipation that at least things are not going to become more acrimonious again in the near term can drive the US equities psychology. And that should then be accentuated by the need for under-invested individuals and especially portfolio managers to purchase equities on any setback (more below.)
While that leaves a 'hostage to fortune' in any return of overt US-China hostility, there is now quite a bit of substantial lower support in the US equities. As such, any fresh US-China confrontation would also need to be substantial to upset markets enough to drop US equities back below that now meaningful lower support; which is not really expected, at least not at this juncture.
Yet in the final analysis of the sheer equities trend, it is all very impressive and reinforces the natural tendency of ‘Santa Portfolio Manager’ to benefit others by needing to apply any excess cash to purchases of well-regarded stocks in positive equities years.
Now we just need to see how the markets respond to the idea that there may be a revival of coordinated global economic strength if indeed there is a broader US-China rapprochement (which still seems quite far off in the distance.) Yet for now that anticipation (along with just a bit better European and Chinese economic data) has also weighed on global govvies and inspired an overall bid in emerging currencies (even if the latter faded a bit late last week despite US equities strength.)
The bigger foreign exchange question is why seemingly constructive Brexit developments along with the better global economic anticipation have not helped the euro or the British pound. Each of them has dropped back down to key lower support areas, which has brought some surprising strength to the previously weak US Dollar Index.
Yet none of that is going to derail the Santa Claus rally in the near-term. This can only occur in the (as noted above) unlikely event of a return of significant US-China acrimony.
▪ Based on this year’s extensive bullish anticipation, it is obvious that Santa is already in town. While he tends to increase his influence from Thanksgiving into the middle of December, he seems to be starting early this year on the positive US-China inferences noted above. As such, in spite of any setbacks it is likely the US equities will maintain their overall up trend into this month by holding setbacks, like the one they recently experienced on concerns over the Fed's less accommodative guidance (yet which was so short-lived.)
We suspect any December S&P 500 future downside reaction from higher Oscillator resistance will either hold into the lower 3,065-70 Oscillator threshold it overran last week, or at worst ratchet down to no worse than heavier support around that old July 3,030 area all-time high (with a Tolerance into the 3,025-15 range that was seen during the post FOMC sharp reaction.)
As this tendency goes back through many years of our late year seasonal analysis, we are very comfortable repeating our assessment from years gone by… [Original version posted Monday, December 23, 2013]
One of the key aspects which many market participants expect to be critical at this time of year is whether or not there will be a classical ‘Santa Claus’ equity market rally into the end of the year. And we say there is a certain element of humbug inherent in any such assumption.
Even as a Very Merry disposition is apparent in the recent major extension of the equities rally reinvigorated by the better prospects for US tax reform, the question remains “Who is this capitalistic, market profit-oriented ‘Santa’?” Of course, there is a question of whether anyone really believes Santa Claus exists in a market context in the first place, regardless of their personal life desire to believe or not.
In fact, the idea there is a Santa Claus which visits the broad market indices in December is at least a bit of a misnomer. In truth, as we have noted each year, any benefits to the broader market into December is more so due to ‘Santa Portfolio Manager’, and whether he decides to provide joy from his cash hoard to the other market participants.
And his tendencies in that regard are self-serving rather than altruistic. He must assess whether it looks smarter to be holding cash or holding stocks. And that in turn has to do with the position of the market indices relative to their highs or lows of the year. The further below their highs of the year (or indeed closer to their lows) the stock indices are trading into December, the less inclined that ‘Santa’ is to provide gifts to the other participants in the form of further purchases. Sort of a “Scrooge’s Scrooge” in those sorts of already trying times.
However, the closer the indices are to their highs of the year, the more so Santa Portfolio Manager is inclined to provide cash to the market so that he is fully invested at the calendar year-end… regardless of whether his overall returns for the year have been spectacular or second-rate.
To wit (and to the tune of Santa Claus is Coming to Town)…
Verse:
He buys them when they’re lower,
He buys them when they’re high.
Can’t have any cash on the books
When New Year’s Day is nigh.
Refrain:
No need to pout,
No need to cry.
He’ll only shout,
“Buy, Buy, Buy.”
Santa Portfolio Manager’s
Coming to town.
▪ All previous analysis from the Market Observations (lower section, available to all Gold and Platinum subscribers) in our Weekend: Oddities and Anomalies? post that were updated after last Tuesday’s US Close remain the operative Evolutionary Trend View, except as updated in recent emailed notes. The next full Commentary will be posted once we have the final details of the US government budget deal that must be struck by the end of this week.
Thanks for your interest.
