Dow and S&P 500 finish 2021 at a record high after a “Santa Claus rally”

Vrasidas Neofytou
Head of Investment Research

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Dow and S&P 500 finish 2021 at a record high after a “Santa Claus rally”

Investors shrugged off Omicron-led fears pushing the S&P 500 and Dow Jones indices nearly 5% higher in December, thanks to a “Santa Claus rally” boosted by gains in utilities, consumer staples, real estate, and energies.

2021 has been a very good year for the financial markets and the bullish momentum has carried into the final trading days of the year, despite the record high Omicron-led covid infections around the world and the renewed travel and social restrictions.

Historically “Santa Claus rally”:

The good old-fashioned “Santa Claus rally” has been a historically strong period for equities and risky assets during the aka the last 5-10 trading days of the year and the first days in January. Statistically, the “holiday season” trading period has seen positive returns on nearly 80% of the time since 1928.

The milder-than-expected effects from the highly mutated Omicron variant on the economy gave the green light for the 2021’s “Santa Claus rally”, with most U.S. stock indices posting gains for the last six straight sessions, despite the sell-ff in travel stocks.

Market reaction: Indices rise to new record highs:

Global economic growth and record-high stock markets supported this year from the accommodative monetary policies from the Federal Reserve, the zero interest rates, the pandemic-led massive fiscal stimulus, the successful anti-covid treatment front, and high rates of vaccinations.

The S&P 500 index settled at 4,793 or up 0.15% on Wednesday, posting its 70th record close of the year so far, which has been the second highest number of record closes for the benchmark index during a calendar year, trailing just 1995′s 77 record closing highs.

S&P 500 index, Daily chart

The S&P 500 index has been overperforming Dow and Nasdaq for the first time since 2005, gaining almost 28% so far in 2021, while Nasdaq, Dow Jones, Russell 2000 advanced by 23%, 20%, and 14%, respectively, at the same time.

The industrial-related Dow Jones index saw its sixth straight positive session yesterday, also posting a new closing high of 36,488 or up 0,25% yesterday, the first closing high since November.

Looking at the 2020 pandemic-winner tech sector, the tech benchmark Nasdaq Composite lagged from the other major economic-led indices, edging lower by 0.1% to 15,766.

The weakness in the tech sector came after investors moved away from the high-growth and high-leverage tech companies (which have benefited from a zero-rate environment) into the safety of value stocks.

Travel vs Defensive stocks:

The outbreak of the Omicron has been a negative catalyst for the tourism and travel-related stocks, as more than 10,000 flights were cancelled during the Christmas holidays around the world, many cruise lines have rescheduled their cruising program, while hotels and restaurants have seen cancellations.

On the flip side, the traditionally defensive sectors such as health care and consumer stables hit fresh record highs during the Christmas period, including Pfizer, Domino’s Pizza, McDonald’s, Yum Brands, Costco, and Procter & Gamble.

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