Omicron Is Surging. Inflation Is Rising. But Investors Are Dreaming of a Santa Claus Rally.
The New York Stock Exchange lit up in Christmas colors.
Bryan R. Smith / AFP via Getty Images
Is it Santa or merely rational exuberance?
With the possibility of a record spike in Covid-19 looming, the S&P 500 index nevertheless headed into the Christmas weekend with a record of its own. And even stocks that ordinarily would be thought to be vulnerable to another surge, especially travel-related companies, enjoyed robust rallies for the week.
All of which marks a big turnabout from the steep slide on Black Friday in November after the first reports of the Omicron variant. Since then, the market has tended to wax and wane on headlines about the surge in new cases in the U.S., Europe, and elsewhere.
After another rough Monday following more bad news about crowded emergency rooms and the scarcity of Covid tests relative to demand, the overall market and particularly the reopening stocks rebounded. President Joe Biden tried to blame stocks’ 1%-plus drop on Monday on the apparent scuttling of his $1.8 trillion Build Back Better proposal by Sen. Joe Manchin (D., W.Va.), who holds the deciding vote in the Senate. But many market pros weren’t surprised; one quipped privately that “President Manchin” wasn’t ever going to approve the bill.
Airline, hotel, and cruise-line stocks had double-digit rebounds by week’s end from their Monday lows as the overall market appeared to look beyond the Omicron case surge. Evercore ISI healthcare analyst Michael Newshel thinks U.S. cases could top the superpeak of about 250,000 reached earlier this year, according to the firm’s widely read daily research packet.
The good news is that cases have already appear to have peaked, with relatively few deaths, in South Africa, where the Omicron variant was first reported last month, suggesting a similar pattern for the U.S. Along with those hopeful portents, the U.S. Food and Drug Administration cleared Pfizer ’s (ticker: PFE) Covid-19 pill, which has been shown to be 89% effective in preventing hospitalization and deaths, nearly triple the efficacy of Merck ’s (MRK) competing drug, which the FDA also authorized.
This potentially good news comes at one of the most wonderful times of the year for the stock market. The so-called Santa Rally typically comes between Dec. 27 and Jan. 4, according to the Stock Trader’s Almanac. Aside from seasonal lore, that period typically marks the end of harvesting of tax losses for the old year and getting a jump on the January rally, which frequently involves snapping up the losers depressed by tax-related selling.
But inflation may prove to be a more formidable factor, especially for consumers. Personal spending rose a seemingly robust 0.6% in November, the Commerce Department reported on Friday. But the personal consumption deflator posted the same 0.6% increase. So, in real terms, spending stalled, while personal income increased 0.4%, less than rising prices.
Household wealth is more than keeping pace with inflation, rising by an additional 15% in the fourth quarter based on gains in stocks and the continued ascent in home prices, according to Evercore ISI’s estimate. For those fortunate to own these assets, that at least is reason to celebrate.
Read more Up and Down Wall Street:What Will It Take to Kill This Bull Market? We’ll Find Out Next Year.
Write to Randall W. Forsyth at [email protected]
