Some December hurdles could create market bumps ahead of a Santa rally

Published Tue, Dec 1 20206:57 AM ESTUpdated Tue, Dec 1 20209:30 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Odds are good that December will be positive for stocks, but strategists said several events could create headwinds as investors hope for a Santa rally. Futures were jumping to start the month , but many on Wall Street see some potential volatility ahead this month. As December begins, there is double testimony Tuesday and Wednesday from Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin before Senate and House panels on pandemic relief programs. The markets are watching to see how much Mnuchin discusses a new fiscal stimulus program and whether it seems there could be progress. In prepared remarks ahead of the testimony, Mnuchin said a "targeted fiscal package would be appropriate" and that the Trump administration would support a spending plan. There has been some hope a fiscal stimulus package could be approved in the few weeks ahead of the inauguration of Joe Biden, but that is not currently expected by markets. "I think there's a better-than-even chance, and I know it's not expected, that we'll get stimulus in the lame-duck session," said Barry Knapp, director research at Ironsides Macroeconomics. "You do have the $500 billion Mnuchin pulled from the Fed and said he wanted to repurpose." In his remarks, Mnuchin said Congress should use the funds from Fed emergency programs before they expire at year-end. The Treasury declined to extend several Fed programs, initiated as markets seized up in March. Those programs were mostly little used, and the Fed said it would return the funds, a total of $455 billion. Knapp said if combined with the $500 billion Republicans agreed to spend, that could create a near $1 trillion stimulus package that could provide aid to businesses and the unemployed. If there is no deal to provide unemployment and other assistance before CARES Act programs expire at year end, the market could react negatively, particularly if the employment report or other data shows that the economy is slowing. But weaker jobs data may also ignite speculation that Congress will feel pressured to provide aid sooner than the first quarter. If Congress does not provide an extension, some unemployment benefits, the moratorium on evictions and student loan deferrals would all expire at the end of the month. Labor market health check Two important readings are coming on the labor market this week: Weekly jobless claims data Thursday and November's employment report Friday should signal whether the job market is weakening as feared. Jobless claims rose in each of the past two weeks, as the virus continued to spread across the U.S., and the worry is another round of layoffs is coming as states shut down activities during another surge in the pandemic. Economists expect about 500,000 payrolls were added in November, after 638,000 jobs were created in October. But some economists expect there were far fewer. Bank of America economists, for instance, forecast just 150,000 jobs. In the week following the jobs report, Congress must approve a spending bill to keep the government operating. Some strategists point to the Dec. 11 deadline as a potential time for clarity on stimulus, since Congress could attach other items to that bill. Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed could step in to help the situation when it meets Dec. 15 and 16, if no action is taken by Congress. "Not that long ago, there was a week where there was a number of Fed officials, including Powell, that were all making comments," Arone said, adding they were consistently warning about the fallout if there was no stimulus to help the economy. "They really were sounding the alarm for the economy and the potential for a double-dip recession. Those comments were concerning," he said, "Here we are weeks later and progress has not been made, and it doesn't look like there'll be a deal perhaps until after the inauguration. I think the Fed could feel compelled to do something." The market has speculated the Fed could extend the duration of the Treasury securities it is buying, and the Fed confirmed that was one thing it was contemplating. That would theoretically pressure long-end interest rates, which influence things like mortgages and other loans. But with rates at current low levels, Knapp said he does not expect Fed officials to tweak the asset purchase program. The Fed is buying $80 billion of Treasury securities, and just about 10% have durations of 10 to 30 years. The market has clearly been divided on this topic, so there is potential for markets to move on any outcome. Will Tesla rock the boat? Knapp said one market event that investors are also watching is the inclusion of Tesla in the S & P 500. He said that could put some temporary pressure on the S & P 500, since investors sell the other shares in the index to clear way for Tesla. S & P Dow Jones Indices said Tesla stock will be added before the opening of business Dec. 21 , based on the closing price Dec. 18. Tesla's current market cap of $437 billion would generate $72.7 billion in required trades, in addition to normal rebalancing trades, according to S & P index analyst Howard Silverblatt. Santa rally Despite the obstacles, strategists see a higher December for the market. Since World War II, the stock market has been up 1.5% on average in the final month of the year and has been positive more than 70% of the time. But with strong gains in November, there is a risk that some of the December gains will be pulled forward. The S & P 500 was up 10.8% in December, its best month since April. The Dow's 11.8% gain was its best one month performance since January 1987. "It seems to me the pattern is we rally during Thanksgiving week. There's all this hype about how good Black Friday was, and then the beginning of December is squishy. It would be very shocking if we had a weak December," Knapp said. "We really only sell off in December when you're going into a recession.'

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Odds are good that December will be positive for stocks, but strategists said several events could create headwinds as investors hope for a Santa rally.

Futures were jumping to start the month, but many on Wall Street see some potential volatility ahead this month.