Will Santa Claus skip over Wall Street this year?
The traditional feel-good, year-end stock rally seems improbable given the dreadful performance of Wall Street this year, yet some analysts say the market may have already discounted the worst.
A relatively resilient market in the past weeks suggests investors may be looking forward to an economic recovery sometime next year instead of backward to the darkness of the economy this year.
“Compared with three months ago, most economic measures are far weaker than they were,” said Gregory Drahuschak, analyst at Janney Montgomery Scott.
“The stock market, however, is not as weak as it was when the economic data were better than they are now. The point is that the market and economic expectations may be diverging, which from a market perspective offers promise that despite the news, stocks could run counter to the currently pervasive negativism,” he said.
Fred Dickson at DA Davidson & Co said Santa may come to Wall Street but with a sparse supply of goodies.
“The continuing drama over the auto industry combined with the lengthening line of companies coming to Wall Street with fourth-quarter earnings warnings most likely will limit the extent of this year’s expected Santa Claus rally,” Dickson said.
In the week to Friday, the Dow Jones Industrial Average of 30 blue chips lost a modest 0.07 percent to 8,629.68.
The tech-dominated NASDAQ gained 2.08 percent to 1,540.72 and the broad-market Standard & Poor’s 500 added 0.42 percent to 879.73.
The market remains focused on the survival of the massive US auto industry after the US Senate rejected an emergency loan. Now the focus turns to the White House, which indicated it may use funds from the Troubled Asset Relief Program to avert a cataclysmic collapse.
The automakers “could get some TARP money that can help boost the market on Monday [tomorrow] and give us room to breathe,” said Marc Pado at Cantor Fitzgerald.
In the coming week, the market also awaits the outcome of a two-day US Federal Reserve policy meeting, amid expectations of a half-point cut in the base lending rate to 0.5 percent in an effort to ward off deflation.
The rate cut “will be a mere technicality,” Avery Shenfeld of CIBC World Markets said.
“How can it matter what the fed funds target is, when the actual fed funds rate has already been trading within a hair’s breadth of zero? Cutting the target to a half or quarter-point is therefore mostly ceremonial,” he said.
More striking than the stock market action has been the bond market in recent days.
The zero interest rate scenario and fears of deflation became evident in the bond market in the past week, when yields on some short-term Treasury bills fell below zero.
“Of all the weird things happening in financial markets these days, perhaps no stranger is what occurred this week in the Treasury market,” said Sal Guatieri, economist at BMO Capital Markets.
“For the first time since the government began selling T-bills in 1929, the three-month rate turned negative, albeit briefly. Allegedly, even in the Great Depression investors weren’t so panicky that they willingly paid the government to borrow [and protect] their money,” Guatieri said.