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2019 may be the year for an epic Santa Claus rally on Wall Street

Brian Sozzi
·Editor-at-Large
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Many pros on Wall Street are banking on the return of the Santa Claus Rally this year. And who can blame them.

Although it doesn’t feel this way amid frequent tweets from President Trump on his trade war with China, the WeWork meltdown, the IPO stock beatdown (we see you Uber, Lyft), decelerating corporate earnings growth and slowing GDP globally, the S&P 500 and Nasdaq Composite are up 11% and 12%, respectively, this year. The Dow Jones Industrial Average is up 7% in 2019 — that’s no small achievement considering the terrible years financially for key components Caterpillar (CAT) and Boeing (BA).

Microsoft (MSFT) is approaching a $1.1 trillion market cap after a series of big quarters. Apple’s (AAPL) stock has surged 46% despite the Chinese economic slowdown and stress on its supply chain from less than ideal trade conditions.

Take this resilience of the market’s most important names and factor in an ever friendly Federal Reserve with respect to interest rates, and the stage is set for stocks to power higher into 2020, many veteran investors proclaim. In other words, get ready for the Santa Claus Rally and all the joy it so often brings to investor bank accounts.

A Santa Claus Rally is a trek higher in equities in the final week of December through the initial two trading days in January. Its precise cause has never been greatly explained — theories range from yearend tax considerations to people spending their fat bonuses to buy stocks.

NEW YORK, NY - DECEMBER 01:  Santa Claus attends the 93rd Annual New York Stock Exchange Christmas Tree Lighting at New York Stock Exchange on December 1, 2016 in New York City.  (Photo by Mike Pont/WireImage)
(Photo by Mike Pont/WireImage)

Obviously, the Santa Claus Rally was non-existent in 2018 — a convergence of rising fears of Trump’s trade stance and rising interest rates from the Fed sent stocks to their worst showing in about a decade. The dread culminated with what has become the “Christmas Eve Massacre,” where the S&P 500 tanked 2.7%.

In 2017, the Santa Clause rally was alive and kicking.

Here is what several pros said on Yahoo Finance’s The First Trade about the Santa Claus Rally setup this year.

Brian Levitt, Invesco global market strategist

“I think we are going to do well into the end of the year. I think we are going to do well on an improving policy backdrop. I didn’t say a good policy backdrop, just an improving policy backdrop. If 2018 was a year of really good growth and bad policy, 2019 was a year of slower growth and incrementally better monetary policy. I think the end of this year and into 2020 will be improvements in economic activity amid a better tone in policy.”

Levitt says the time to be defensive is over. He favors cyclical areas of the market.

Scott Clemons, Brown Brothers Harriman chief investment strategist

“I think it may happen this year because some of these macroeconomic concerns worrying the market begin to dissipate in one or another. And then maybe investors turn back to an outlook for 2020 that’s not so dire. There is a lot of talk about a recession in the air and the inverted yield curve. But as long as the consumer is strong, as long as wages are growing ahead of inflation that’s fuel in the tank not only for economic activity but also corporate earnings.”

Marvin Loh, State Street senior global market strategist

“I attribute a lot of this year’s gains on the central banks, certainly a 20% gain is nothing to laugh at and we are all happy about it. But if we look at it from the DAX or S&P 500 perspective, gains in the U.S. have been in the low single digits and for the rest of the world negative. So if you start thinking about a Santa Claus rally, does it pull the central bankers back and I think that is a critical part of the discussion.”

If the Fed does become less dovish into 2020, make no mistake, the probability of a Santa Claus rally would go way down. The Fed is scheduled to meet two more times this year to set interest rate policy.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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