On Wall Street, Santa Claus showed up early, and even if he skips town early, he'll leave investors in good cheer.
"I don't think people were forecasting 30% returns, and all we had to do was not have a recession," Nick Raich, CEO of the Earnings Scout, told CBS MoneyWatch, referring to the market's advance from a year ago.
The last five trading days of the year and first two of the next are viewed as the window for what Wall Street calls the "Santa Claus rally," a short burst in which stocks tend to do especially well — in the S&P 500's case, rising an average 1.3% since 1950, according to the Stock Trader's Almanac.
Jeffrey Hirsch, editor of the Stock Trader's Almanac, calls the five-day period "a first indicator for guidance in 2020."
"We can have this Santa Claus rally persist, but it can't continue indefinitely if we see earnings weaken," Raich said.
Fifteen S&P 500 companies delivered first-quarter 2020 earnings estimates in November, collectively cutting earnings-per-share estimates by 1.62%, according to Raich's tally. "That tells me that earnings estimates are very likely to be cut in the weeks and months ahead," the analyst said.
"Investors are paying more for less earnings than they were a year ago heading into 2020," said Raich. "What's being priced in now is for earnings growth to re-accelerate, so that has to occur, just so stock prices can be maintained."
What a difference a year makes
What's striking is just how different things are now as opposed to a year ago, when the Dow Jones Industrial Average fell more than 1,000 points on Christmas Eve, only to make it up the next trading day. As things then stood, the Federal Reserve was tightening interest rates and investors were bracing for recession. When the economic downturn didn't occur and the Fed soon adopted a more accommodative policy that had it cutting rates rather than raising them, stocks sailed to record highs in 2019.
"If we flip it over, it should have been a disaster for 2019 because of the way markets finished up the year [last December]," Paul Nolte, a vice president of Kingsview Wealth Management, recalled of the end of 2018, when stocks fell about 2% in the worst Christmas-Eve pullback on record.
Prior to last year's pre-holiday selloff, the worst decline recorded by any of the four indexes on either of the two days before Christmas was 1.63% by Dow in 1997, according to Hirsch at the Stock Trader's Almanac.
But we didn't know then what we know now. Given that December 2018 and December 2019 proved to be polar opposites, "what's to say 2020 can be [another] polar opposite for stocks?" Raich asked.
"The decade almost corresponds to the bull market that started in March of 2009, so it's been a good 10 years for those in the market," with the S&P 500 up 377% since March 2009, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
However, if one goes back two decades, things are less merry for invetsors. Those who invested in stocks in late 1999 near the top of the dotcom bubble that popped months later would see that money up only 6.05% today with dividends, according to Silverblatt. As he put it: "That's just about where a 20-year bond was trading back then, so if you took the money and put it in a 20-year bond and went to sleep for 20 years, you'd basically have the same amount."
"We are getting the Santa Claus or the Christmas rally, but it seems like it's coming early, so the question is, will old St. Nick stick around the next five days?" Silverblatt said.
As of Tuesday's close, the S&P 500 was nearly flat for the abbreviated trading day, but up about 2.6% month-to-date, 8.3% for the quarter and nearly 29% for the year.