2020 has been a wild year that will be studied in history books by future generations. It's had numerous impacts on all areas of life that will only be fully digested in the coming years. The stock market is no exception. The year started off with a 10% rally that eventually turned into a 35% crash once the coronavirus's contagiousness and danger became clear.
This created a generational buying opportunity due to a combination of federal stimulus, central bank aggression, and the economy's resilience, stocks staged a V-shaped rally that is now higher by 14% year-to-date. While there's considerable economic pain and many challenges to come, the markets' optimism has been validated with the vaccine and resilience of corporate earnings.
With two-shortened weeks left in the year, conditions are ripe for a "Santa Claus Rally". Every year, the market has a tendency to rally into year-end. This has become so ingrained in market participants' heads that it's almost become a self-fulfilling prophecy of sorts. It's likely that 2020 will bring an even more exaggerated year-end rally for the following reasons:
1. Year-end rallies tend to be bigger in years with a positive return on stocks: When investors are in the green, they are more likely to be aggressive and bid up stocks. It's been statistically shown that the year-end rally tends to be bigger in years with bigger gains, while the effect is muted in down years.
2. Thin trading environment with heavy retail participation: We kind of had a preview of the last two weeks of the year during Thanksgiving week. We saw big moves in many thin, retail-favorites, while the indexes floated higher. Given the low volume environment, many institutions won't be active, so retail traders will dominate. This year, retail traders are very bulled up and have been chasing all sorts of high-flyers.
3. Underperforming fund managers: Many fund managers are underperforming the S&P 500's 15% gain. It's understandable that many were focused on the economic picture and health situation and underestimated the economy's resilience. However, they either have to chase stocks or end the year at a loss and face some sort of career risk or investors pulling money. This explains the market's recent price action in which any dip is immediately bought.