Tuesday 4 December 2018 8:09 am

Will markets have a jolly festive season this year?

Karen Tso is anchor on CNBC's Squawk Box Europe.

It's December and time to deck the halls with boughs of holly. Or in CNBC’s case, it’s time for the business channel to be immersed in chatter of a potential Santa Claus rally and 2019 fortunes.

Santa’s performance for the Dow Jones Industrial Average has been fairly reliable over the past five years, with investors rewarded in every year except 2015.

But in each of the years when Santa delivered the goods, the market was already trending higher – the exception being 2015, which saw a weaker market, meaning Santa stayed away.

The Dow pattern in 2018 is also lower, but with jagged highs and lows, leaving some nervousness about whether investors will be left empty handed.

There is no doubt that it will take a big bag of quadruple points for the Dow to rally to the October high of 26,950 points. But it is not impossible that a dose of Christmas magic will be sprinkled on the index given the erratic trade we’ve witnessed.

Federal Reserve chair Jerome Powell played his role last week, transforming from Christmas Grinch to peaceful dove when he said that US interest rates were closing in on neutral levels. Powell’s olive branch may have encouraged the Dow to bid farewell to recent lows, but is it enough to sweep the index 11-per cent higher in one month, or more than 2,600 points from its lows, to reclaim the highs?

Tactically, many are open to the prospect.

“The market fall in the last six weeks has discounted many of next year’s problems. A bit of good news, or just an absence of bad news could drive over-sold markets higher,” says David Miller, executive director of Quilter Cheviot Investment Management.

But consensus breaks down around 2019 calls.

“Earnings growth hasn’t been reflected in share prices. Multiple contraction this year has been the most since 2002. Therefore, multiple expansion is quite possible from here,” says Miller, who suggests revisiting technology stocks.

But Michael Howell, chief exec of Cross Border Capital, warns that the bear’s grip will continue. “True bear markets typically suffer 30-50 per cent price falls, and Wall Street’s decline has been seriously lagging other markets until now.”

One missing link necessary to fuel a 2019 rally is global growth.

“Europe and China have been at a disadvantage, with US tightening in response to growth. The mismatch is that monetary outlook has now been alleviated (by the Fed), so it could be that European growth surprises, and China has shifted in its monetary approach to support consumption,” says John Ricciardi, chief executive of Kestrel Investment Partners.

So what’s ahead for investors? This month, it seems that Santa Claus is coming to town. But next year “you better watch out” – or so the jingle goes.


City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.