Would Christmas bring back the S&P500 to August High?

The market staged a strong comeback last week thanks to some better-than-feared earnings reports?

The rebound has set tongues wagging about a potential inflation point.

Topics

Is Inflation the New Black?
A Santa Claus Rally
Incredible Return

Is Inflation the New Black?

Inflation has been relatively dormant in recent years, but there are signs that it may be picking up steam.

Last week’s stock market rally was sparked by earnings reports from companies like Walmart and Cisco,

which beat expectations on both the top and bottom lines.

Investors are concerned that if inflation does start to pick up,

it could put pressure on corporate profits and weigh on stock prices.

However, last week’s rally showed that there is still plenty of demand for stocks even at elevated valuations,

Yardeni said in an interview on CNBC’s “Trading Nation” on Tuesday.

The market strategist has a year-end target of 4,000 for the S&P 500.

A Santa Claus Rally

A Santa Claus rally would put the index above its 200-day moving average, currently at 3,818.

It would also confirm Yardeni’s thesis that a U-shaped recovery is underway for stocks following the coronavirus sell-off in March, the market strategist said his bullish outlook is based on three factors:

central bank support, progress on vaccines and President Donald Trump not being re-elected.

First and foremost, amongst these reasons is central bank support—or what Yardeni called “the mother of all Put options.” He also said “The Federal Reserve has been pumping money into financial markets through asset purchases and keeping interest rates near zero to help offset the economic impact of Covid 19”

A Santa Claus rally is a sharp and sustained increase in stock prices that typically occurs in the last week of December.

The rally is named after the legendary figure who brings gifts to children on Christmas Eve.

The Santa Claus rally is often attributed to year-end buying by mutual fund managers,

who reinvest cash that has come into their portfolios from investor redemptions and dividends.

Other factors that may contribute to the Santa Claus rally include positive investor sentiment about the upcoming year and window dressing by portfolio managers, who buy stocks at year-end to improve the appearance of their portfolios before they are reported to clients.

Incredible Return

With the midterm elections just around the corner, investors are wondering if a Santa Claus rally is in store. Historically, Santa Claus rallies have been more common during midterm election years, with Yardeni Research discovering that there have been 19 such years since 1950. Of those 19 years, 14 saw further gains through March 31st of the following year, for an average return of 7%. So, as we approach December 2018 and the midterms, investors should keep an eye out for indicators of a potential Santa Claus surge.

With the stock market on shaky ground, many investors are wondering what the potential returns could be on SPY if the S&P 500 retraces its August highs. According to Yardeni, the index could see a 15% rally over the remainder of the year. This would translate into an impressive return of 15.4% for SPY investors if his scenario plays out.

While this return would be welcomed by many, it is important to remember that there is no guarantee that Yardeni’s predictions will come true. The market is notoriously difficult to predict and anything could happen in the coming months that could send SPY tumbling back down again. However, for those who are willing to take a risk, investing in SPY now could lead to some very healthy returns by year’s end.”

The SPDR S&P 500 ETF Trust (NYSE: SPY) could potentially return 15% over the remainder of the year if the S&P 500 retraces its August highs, as hinted at by Yardeni. If SPY rebounds to reach its mid-August intraday high of $431.73, this would result in the same return on investment.