The Breakdown - A ‘Santa Claus Rally’ for the Stock Market?

Episode Date: December 5, 2020

Today on the Brief: Payrolls report underperforms expectations Spotify looking for crypto director Lame-duck crypto legislation on the way?    Our main discussion: Will we see a “Santa Claus rally” this year?  This kind of rally refers to the fact that in about two-thirds of years since 1969, late December has seen a stock market rally, averaging a 1.4% gain.  This year, vaccine optimism combined with new stimulus seems poised to once again jingle Wall Street’s bells. A piece in Bloomberg, however, provides five charts and reasons why this market rally is already overbought and overblown, so this year might be more coal than eggnog.   

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and all nodes. And produced and distributed by CoinDesk. What's going on, guys? It is Friday, December 4th, and today we are talking about whether there will be a Santa Claus rally for the stock market. First up, however, let's do the brief. First up on the brief today, the new payrolls report for November is out, and once again,

we have undermet expectations. Bloomberg's piece says U.S. hiring rebound markedly slows amid surge in virus cases. So non-farm payrolls increased by about $245,000 this month. Estimates had been for a gain of $460,000. The unemployment rate dipped 0.2% to 6.7%. And we saw most disturbingly, significant decline of Americans actually participating in the labor force. So basically this is just a group of people who have now taken themselves out of the job search altogether. So how are markets responding? Well, interestingly, the treasury yield is up. That means less demand for treasuries. That usually means a sense that things are getting better. But it's complicated. Gila Base, who is Janie's chief fixed income strategist, says, non-farm payrolls this morning,

we've got a classic problem. A strong report is a sign of stable economic growth despite headwinds. A weak report could be the catalyst needed for compromise over stimulus. It's the muddy middle that gets complicated. He then followed up once the report was out. Post-non-farm payroll curve steepening is a clear bet on fiscal deal moving closer. In other words, he's saying that the treasury yield curve going up is a signal that people think that this means that stimulus is on the way. This was echoed by Jeffrey Rosenberg, a senior portfolio manager at BlackRock who said the market reaction is really looking through this to the policy response. So then, how are stimulus talks going?

Well, the Wall Street Journal headline reads, coronavirus stimulus talks moving in the right direction. That statement, the entire article, and everything that they've said about it, plus $4 or so, will buy you a tall gingerbread latte. In other words, who knows if it's actually getting closer? Second on the brief today, Spotify is looking for a new crypto and payments director. According to a new announcement, Spotify is looking for an associate director to join its payment strategy and innovation team. This job will do things like access the payments landscape, but also, quote, lead its day-to-day engagement with the Libra Association, which is now obviously the DM Association. Spotify is one of the 27 members of that DM Association.

And why it's interesting to me is that frankly it's kind of hard to remember sometimes that DM is still a live project. It has just been so continuously hammered with so much turnover, so much change in what it's expected to be. It's fallen so far from the grand ambition that Facebook had when they announced it that, again, it's hard to remember in some ways or take it as anything other than sort of the shell of what might have been. However, their members still do represent a huge number of internet citizens. so if the thing actually starts cooking, maybe it is going to deserve a closer look again. Last up on the brief today, lame duck crypto legislation coming? While we've all been yammering about the Stable Act, we've forgotten that literally just last

week there were rumors abounding that the U.S. Treasury was going to drop some onerous late-term legislation around self-custody. Office of the Comptroller of the Currency Chief Brian Brooks went on CNBC today to discuss, so let's listen. First start off by asking you about a tweet that your former boss at Coinbase's CEO Brian Armstrong sent out last week. And he said that the Treasury could be, quote, planning to rush out some new regulation regarding self-hosted crypto wallets before the end of the term. Is that true? Yeah, look, Melissa, you know, rumors abound in Bitcoin more than almost any other place.

What I would tell you is we're very focused on getting this right. We're very focused on not killing this. And it's equally important that we develop the networks behind Bitcoin and other cryptos as it is that we prevent money laundering. in terrorism financing. So believe me, there's a balance here and it's going to work for everybody. So that's a neither a yes or no answer to that. Should we be expecting some new regulations by the end of the Trump term? I think you're going to see a lot of good news for crypto by the end of the Trump term. Some of us are going to have to do with banks connecting to blockchain. Some of us are going to be more clarity around the nature of these assets. So believe me,

there's going to be very positive messages coming out. At the same time, it's a dangerous world out there. We have to be honest about that. But nobody's going to ban Bitcoin. Nobody's going to ban some of these transmission technologies. I think it's going to be a lot less bad than people will worry about. On the one hand, I like some part of what we're hearing. On the other hand, to be honest, that wasn't that reassuring. That said, it is interesting that he's implying that we're going to get further clarity with crypto banking. And I wonder, to what extent the Stable Act folks, the people who introduced the Stable Act, know what's coming and wanted to get out ahead of the narrative with the Stable Act so that going into a new Biden administration in a new session of Congress, we have

these competing forces, whatever Brooks and the OCC are going to push through in the last few weeks of a Trump administration versus what those behind the Stable Act want to see instead. This episode is brought to you by Crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you can. could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the crypto.com app today. Looking for the best way to stay on top of your investment game?

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First, let's discuss what a Santa Claus rally is. The concept is that there's a tendency for the stock market to rally over the last few weeks of December into the new year. You might be asking, is this a real thing? And the reality is, yes, it is. More than two-thirds of December's dating back to the 1960s have resulted in positive gains. To get more specific, according to the stock trader's almanac, the last five trading days of the year and the first two of the next year are the period in question.

and since 1969, the Santa Claus rally has yielded positive returns in 34 of 45 years, averaging a cumulative return of 1.4%. The next obvious question becomes, what are the reasons that people think this happens with such consistency? And there are a few answers. The first is increased holiday shopping, right? Check that cash register. It's good for business. The second is optimism fueled by that same holiday spirit. People are feeling good. The end of the year. is coming, a new year is beginning. Optimism tends to abound in those times. We have an entire canon of literature and movies and culture that tell us that story over and over again every year.

A third is Wall Street bonuses, and I love how many different narratives Wall Street bonuses impact. I mean, I remember how many times we've talked about Wall Street bonuses in the context of Bitcoin as well. Lastly, there's a sense that institutional investors settled their books, go on vacation and chill, letting retail frolic in this last period. And of course, retail is historically more bullish, more excited, more willing to spend on these stocks. Oh, and I guess there is actually one more as well, which is the anticipation of a January effect. And at this point, you may just think we're naming BS and you wouldn't be wrong, but the January effect is a rally that follows a theoretical December sell-off when investors who are tax loss harvesting to offset realized capital

gains prompts a sell-off. From 1928 to 2008, the S&P 500 rose 56 out of 91 times in January, which is 62%. So what is this year likely to be like? Well, there are two big reasons that people think we could still see some sort of positive December action. The first is the vaccine rollout. Although Pfizer has had to slash its targeted vaccine rollout at half after finding raw materials in early production did not meet its standards, there's still a lot of optimism about vaccines actually coming to market. The second is stimulus. We mentioned the status of stimulus above, and while I was being snarky, it does seem like it's moving closer, and perhaps the misnumbers on the job report are part of a catalyst to

finally get a deal done. However, a new Bloomberg piece points to five charts that suggest that we may not, in fact, be in store for a Santa rally this year. Let's go through those charts and find out why we might be all in for lumps of coal in our stock market stockings this year. The first chart Bloomberg points to is the Bollinger band, and a Bollinger band are a type of price envelope that defines upper and lower price range levels. Bollinger bands use two parameters, period, and standard deviation, with the default value being 20 for period and two for standard deviation. Basically, this is how this indicator works, and this is

from Fidelity. When the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction. This may begin a trending move. When the bands separate by an unusually large amount, volatility increases and any existing trend may be ending. Prices have a tendency to bounce within the band's envelope, touching one band and moving to the other. These price swings can help identify potential profit targets.

So what does Bloomberg's targets say then? Well, November closed above its upper band, suggesting that we may be in for a period of consolidation. Following each of the last three times this happened, U.S. stock benchmarks posted declines for at least the next two months. Our second Nodilus chart is the options chart. The CBOE has a gauge that measures the volume of bearish options bets relative to bullish options bets, and the indicator's five-day moving average is currently at its lowest level in 20 years, meaning extreme investor positivity. Ironically, this can be a contrarian signal. The third chart is broad participation, and the question here is, what's left to gain, or more specifically,

who has room to run? Currently, 93% of stocks in the S&P 500 are trading above their 200-day moving average, which is the highest in seven years. And so overall, there's a sense that this is an indicator that there's really no more room to move in this particular rally. Related is the fourth chart presented by Bloomberg, which is stretched tech. This has been a concern for a while now, that the tech rally that has defined so much of the traditional markets this year has gone too far. The NASDAQ 100 is up two standard deviations above its 50-day moving average, which really suggests that maybe it's overbought. That said, tech wasn't the driver in November.

Instead, November was all about cheap value stocks that had fallen too far relative to their technology peers and had some room to catch up. Finally, the last measure that Bloomberg points to, they call the shriller-shiller, and this is about Robert Schiller's cyclically adjusted price to earnings ratio. This is a more fundamental measure of whether stocks are overvalued or not, and by this measure, U.S. stock valuations are back above their 1929 peak just before the Great Depression. The good news is they're still far below their dot-com all-time highs, but they're still really, really high, giving one more piece of evidence that, again,

the markets may be out of sync with reality. At the same time, when it comes back to it, like so much of this year, these markets are incredibly narrative-driven. And you have this radical shock, this total shift in demand that's happened because of this exogenous factor that no one saw coming that literally shut down the economy. And now we're coming into a point where you have one more stimulus on the way. And two, much more importantly in many ways, a vaccine which when it is fully deployed could unleash a huge, amount of pent-up demand. I think ultimately what's happening right now is that markets are betting on those two factors aligning in the short-term stimulus that helps things rise and stay afloat as that vaccine gets rolled out and then ultimately a rip back up as people start to get out, move again,

buy again, travel again, they get less scared, they move from resilience to consumption once more. So whether the market is right or wrong about that, whether we'll see an actual December rip, I don't know. But I thought this would be a fun way to explore what's going on in the side of the market that we don't spend as much time on here on the breakdown, but still, I think, really matters. So I hope you had fun with this one today. I hope you're headed to a great weekend. Until tomorrow, guys, be safe and take care of each other. Peace.