Santa Claus Rally Could Get Grounded By Airline Cancellations

The United States kicks off the week as much of Europe is recognizing the Christmas holiday on Monday. Despite the approaching New Year’s holiday, the U.S. markets are open all week. Between Christmas and New Year’s Eve trading volumes tend to be about 30% lower because many investors take time off.

With low volumes, investors should be careful to use this week as a “tweak week” and not necessarily a full scale trading week. Smaller position sizes and short-term opportunities may be more sensible approaches. Also, many investors may choose to use the week to make any final tax adjustments or final portfolio adjustments for 2022.

However, this is also the week of the famous Santa Claus rally. The Santa Claus rally is a phenomenon where markets tend to rally from the first day of trading after Christmas through the first two trading days of January. The rally doesn’t always happen, but traders built some momentum with last week’s three-day rally.

Last Thursday, the S&P 500 closed at a new all-time high as Santa appears to have started his rally a couple of days early. Despite starting the week on a down note, the S&P 500 still rose about 2.5% on the week, while the Dow Jones Industrial Average and Nasdaq Composite closed shy of their monthly highs. As expected, volumes were lighter as investors left early to get a start on Christmas festivities.

Futures are pointing to a higher open on Monday as investors look to build on last week’s gains. Japanese markets traded a little lower overnight, while Chinese markets were a little higher. GoDaddy (NYSE:GDDY) was 4% higher in premarket trading on news that activist investor Starboard Value has accumulated a sizeable stake in the company. The stock is already up about 10% on a five-day rally.

Airline stocks are trading lower before the bell because of several cancellations over the Christmas holiday. According to NBC, more than 6,000 flights were cancelled globally on Christmas Eve and other 2,000 have already been cancelled today. United Airlines (NASDAQ:UAL) was down 1.8% in premarket trading while American Airlines (NASDAQ:AAL) was down 1.8%. CNBC reported that airline crews called in sick with Omicron infections. Delta Air Lines (NYSE:DAL), United, JetBlue (NASDAQ:JBLU) and Alaska Air Group (NYSE:ALK) had some of the highest cancellation rates. Airline workers getting sick has been an ongoing problem for travel and the supply chain so these problems could continue throughout the week.

According to Mastercard SpendingPulse data, Christmas retail sales were up 8.5% higher than last year. In-store sales rose 8.1%, while e-commerce sales were up 11%. Online sales made up 20.9% of all retail sales this year, compared with 14.6% in 2019. Apparel shopping grew 47.3% from last year, while jewelry purchases increased 32% and electronics grew 16.2%. Consumers got an early start this year to ensure their presents arrived in time for Christmas and didn’t get stuck in supply chain bottlenecks.

Silver, gold and coal could be high on the list of many investors because industrials, consumer discretionary and materials were the top three performing sectors on Thursday. Real estate and utilities ended the day in the red. The 10-year Treasury yield rose 2.47% as oil prices rose 1.39%. However, financials and energy stocks finished in the middle of the pack.

The health-care and consumer discretionary sectors were the top performers for the week. The Health Care Select Sector Index (IXV) rose 1.03% on the shortened holiday week, while the Consumer Discretionary Select Sector Index (IXY) gained 1%. Utilities and financials, which tend to be more interest rate sensitive, were among the worst performers of the week.

So Gross

According to The Wall Street Journal, analysts are lowering their projections for 2022 because of rising interest rates and a decrease in government spending. Less monetary and fiscal stimulus could mean the S&P 500 won’t see the 26% returns like it has so far in 2021 or the 16% returns like 2020.

Last week, the Bureau of Economic Analysis (BEA) reported the estimated Q3 gross domestic product (GDP) came in higher than forecasted but lower than the previous quarter. Falling GDP can be concerning but doesn’t necessarily signal a recession. One problem with GDP is that it focuses on finished goods and doesn’t account for many business-to-business (B2B) transactions like financing production, supply-chain shipments and goods-in-process going from the resource stage to the finished stage. Prof. Mark Skousen, Ph.D. has observed that GDP mostly excludes resources, production and distribution, which are all key instruments to the economy.

Gross output (GO) is a broader measure of the economy because it accounts for spending from all industries, which is larger than consumer spending. In fact, if you were to only look at GDP, you’d think that consumption is the largest economy driver, and many people have mistakenly made that claim. However, investment is bigger when we account for the other steps that go into making final products. For example, in the third quarter of 2021, U.S. business spending was $30.2 trillion, whereas consumer spending in GDP was just $16 trillion.

The good news is that GO among private industries has grown consistently since Q2 of 2020, which tends to be a good sign for GDP. In fact, Dr. Skousen has found that gross output can be a good indicator of a bear market or recession. If GO starts to shrink, then the economy tends to turn down too.

French Toasts: On Nov. 2, the French CAC 40 Index hit its first record close since the dot-com bubble. As of Dec. 23, the CAC 40 has outperformed the S&P 500, FTSE 100 and the German DAX. Luxury stocks have been the top performers for France, which include spirits, perfumes, luggage, watches and jewelry maker LVMH Moet Hennessy Louis Vuitton SE (OTC:LVMUY), clothing and accessory company Hermes International (OTC:HESAF), and luxury goods maker and owner of labels like Gucci, Yves Saint Laurent, and Bottega Veneta, Kering (PA:PRTP). The three luxury stocks make up about 25% of the CAC 40 market cap.

However, oil and natural gas company TotalEnergies SE and banking stocks BNP Paribas (OTC:BNPQY) and Societe Generale (OTC:SCGLY) have also benefited from rising oil prices and rising interest rates. If inflation continues to be an issue through 2022, then these companies could assume leadership of the index. However, that scenario could make life difficult for the luxury companies because consumers could focus more on staples and less on luxuries.

German Pancake: The German DAX has lagged many of the other European stock indices. While it hasn’t been flat, it has failed to keep pace with the French CAC and the British FTSE 100. The DAX is made up of about 45 stocks but is weighted toward manufacturing. Like the CAC, the DAX has greater exposure to luxury items. Its largest sector is technically consumer discretionary, but many of those stocks are automobiles and auto parts. Much of Germany’s growth in 2021 has come from pharmaceuticals, like Merck (NYSE:MRK), Siemens and Sartorius, as well as luxury automobile makers Prosche and Daimler (OTC:DDAIF).

German stocks, like French stocks, could struggle if inflation and interest rates rise because they’ve benefited from the growth in luxury items. A tighter consumption market could limit the willingness of consumers to spend on these items.

International House: One problem with these European stock indices is that each country has few stocks available to them. While California, New York and Texas could probably make some decent indices, a broader index is a better measuring tool. The STOXX 600 tracks 600 companies from 17 European countries. The index has risen more than 20% year to date.

As of Nov. 30, the top five country weightings in the STOXX 600 were 22.3% Great Britain, 16.6% France, 14.9% Switzerland, 14.1% Germany, and 7.6% Netherlands. The top sectors were 14.8% health care, 12.9% industrials (not including chemicals), 8.2% technology, 7.9% consumer staples, and 7.2% banks (STOXX separates banks and insurance where the S&P combine them into financials).

With health care and consumer staples in the top the four sectors, the STOXX 600 could benefit if investors continue to favor defensive stocks. Additionally, with technology as a smaller portion of the index, it could also have less downside risk than the S&P 500 if the trend toward value continues because many technology stocks are considered growth stocks and tend to be more sensitive to interest rate changes.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.