Santa Baby! Is a Holiday Rally Ahead?

Santa baby, I want a yacht, and really that’s not a lot. Been an angel all year…

Those lyrics popped into my head, while writing today’s column. A rising stock market (which means fatter 401k plans), strengthening home prices, high household savings rates, and falling unemployment all add up to a more confident consumer in the mood to spend for the holidays.

So, yes Virginia, dare to believe in a Santa rally this year.

Underscoring bullish conditions are robust corporate earnings results. To date for third-quarter 2021, with 95% of S&P 500 companies reporting actual results, 82% have reported a positive earnings per share (EPS) surprise and 75% have reported a positive revenue surprise, according to research firm FactSet. The Q3 blended EPS growth rate for the S&P 500 is 39.6%.

At the top of the agenda…

The supply chain has been a dominant story in the media, so it begs the question: how often has the term been cited as a major factor during Q3 earnings calls? Quite a lot, actually.

FactSet conducted a survey of Q3 earnings calls that occurred from September 15 through November 19 and found that 342 S&P 500 companies have cited the supply chain during their earnings calls for the quarter. This is the highest total number of S&P 500 companies citing the supply chain on earnings calls going back to 2010. It’s also well above the five-year average of 178 (see chart).

The industrials sector has the highest number of companies that have cited the supply chain on Q3 earnings calls (67), followed by the information technology (46) and consumer discretionary (45) sectors.

The explosive growth of outsourcing, particularly to Asia, is part of the problem. Supply chain disruptions are especially acute for U.S.-based industrial, technology and consumer companies that heavily rely on inputs from China and its neighbors.

However, signs are emerging that these supply chain woes are easing, as the flow of finished goods, components and raw materials starts to pick up within the global transportation network.

In the U.S., major retailers say they’ve proactively imported and stocked most of what they need ahead of the “Black Friday” and holiday shopping season. Retail sales for the rest of Q4 are expected to be strong.

In another sign that inflation-causing bottlenecks are getting sorted out, ocean and trucking freight rates have retreated from record levels. The volume of ships waiting to unload their cargo at the ports of Los Angeles and Long Beach, the pivotal U.S. entry points for Asian imports, is declining.

Remember this Wall Street axiom: Never bet against the American consumer. This year, shoppers seem undaunted by rising inflation. Analysts expect the retail sector to reap a windfall on Black Friday and Cyber Monday.

Watch This Video: All Eyes on Black Friday

That said, the major U.S. stock market indices closed mixed Monday, as inflation worries drove up bond yields and investors digested the news that President Biden had nominated Jerome Powell for a second term as Federal Reserve chair. The Dow Jones Industrial Average rose 17.27 (+0.05%); the S&P 500 fell 15.02 (-0.32%); the tech-heavy NASDAQ fell 202.68 (-1.26%); and the small-cap Russell 2000 fell 11.81 (-0.50%). Rising yields took a bite out of tech stocks.

In pre-market futures contracts Tuesday, the indices were trading slightly lower. Investors are relieved that Biden has kept Powell, a Republican who is widely perceived as a steady hand. But the Fed chair faces many challenges. Powell’s major concern will be to balance the fight against inflation with the need to bolster employment.

The Fed this month started tapering its asset purchases, but if inflation continues to run hot, the central bank may have to accelerate the process. Greater monetary hawkishness could impede the economic recovery and ultimately torpedo the bull market.

Odds are, we’ll see a Santa rally this year. But nothing is guaranteed. If you’re looking for market-beating gains with less risk, you should consider the trading strategies of my colleague Jim Fink.

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John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.