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The grown-up Christmas gist

With the US Federal Reserve finally announcing it will start tapering its stimulus, removing a big uncertainty in the market, can Wall Street expect a stronger finish to the year? Not really.

The “Santa Claus rally” is a seasonal anomaly that describes a rise in stock prices in December, generally over the final week of trading prior to the new year.

The benchmark S&P 500’s average gain during the last five days of December and the first two of January is about 1.5 per cent since 1950, according to Stock Trader’s Almanac. The equities market has gone up in December about 80 per cent of the time for the past 20 years.

Although the S&P 500 is up just about one per cent so far this month, the index is up about 27 per cent for the year and is on track for its biggest gain since 1997.

“It’s been a strong year, and I wouldn’t be surprised if investors closed out their year today,” said Doug Foreman, co-chief investment officer of Kayne Anderson Rudnick Investment Management. “There isn’t much room or news to move higher from here until next year.”

Stocks rallied sharply last week, with the Dow and the S&P 500 closing at records on Friday, following the Fed’s mid-week announcement it will reduce its $85 billion monthly bond purchases by $10 billion.

For the week, the Dow gained 3.1 per cent, the S&P 500 was up 2.5 per cent and the Nasdaq added 2.6 per cent.

Trading volume last week was also below average as many investors had already locked in their gains for the year ahead of the holidays.

“There’s a lot of transparency in the market, but most of the noise has already been made. We should expect to continue seeing light volume and not much selling as we go into [this] week,” said Mark Martiak, senior wealth strategist Premier Wealth/First Allied Securities in New York. “We’re selling our winners and looking to see what sectors could be the ones to be in next year. I like cyclical and industrials. I want to see the news post-holiday season before I start to recommend defensive names.” With Christmas and New Year’s holidays in the middle of the week, trading volume is likely to be lower than previous years. The New York Stock Exchange will close early at 1:00pm ET on Tuesday and will remain closed for Christmas day. Analysts say this week will be a start of investors finally shifting focus to the fundamentals of the economy, like economic reports and corporate earnings.

“With the Fed out of the way now, the market is going to move back to making more rational decisions and focus on what really matters in the economy,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman Wealth Management. “Fourth-quarter earnings will start coming in January and the market’s full focus will be on those numbers and outlooks.”

Economic data due this week include personal income and outlays at 8:30am ET tomorrow. Tuesday’s data include durable goods orders at 8:30am ET and new home sales at 10:00am ET. On Thursday, weekly jobless claims will be released at 8:30am ET.