Year-end rally in shares possible despite a wall of worry

Hold on to your hats. ‘The last few sessions are going to go a long way in creating excessively pessimistic sentiment that generates at least a temporary oversold bounce.’ Picture: NCA NewsWire / Jeremy Piper

Economic risks from the Covid-19 Omicron, accelerated QE tapering by the US Federal Reserve and an apparent withdrawal of support for President Biden’s $US2 trillion ($2.8 trillion) fiscal stimulus plan by Democrat Senator Joe Manchin made for a bad start to the week.

But while the spread of Omicron worsened over the weekend, prompting another lockdown in The Netherlands and a surge in school closures in the US and Canada, the market started to look hopeful after Politico reported that Manchin and Biden will likely continue talks on the Build Back Better Plan next year and Moderna said its vaccines would work against Omicron.

Sharemarkets turned up as multiple reports said Manchin and Biden spoke over the phone on Sunday night after a dramatic public breakdown in negotiations over one of the centrepieces of the president’s economic agenda.

Often some of the strongest gains in shares come in the final two weeks of the year.

Since 1983, the S&P 500 has averaged 1.5 per cent in December with most of that rise typically coming in the final two weeks. So far this month it was flat.

In the last 27 years the S&P 500 has risen in 21 of those years or 81 per cent of the time for December up to the first Friday in the new year, with an average gain of 2 per cent, according to Bell Potter’s head of institutional sales and trading, Richard Coppleson.

Australia’s S&P/ASX 200 has risen 24 of the past 26 equivalent periods, and the average gain in the past 13 years has been 2.5 per cent, Mr Coppleson said. Month to date it was up 1.4 per cent.

So after diving 3 per cent in three days – its worst three-day fall since May – the S&P 500 looked set for a rally after bouncing off its 100-day moving average and closing above an uptrend line drawn from its March 2020 low on Monday.

Australia’s S&P/ASX 200 index rose 0.9 per cent to 7355 points after bouncing off its 200-day moving average at 7257 on Monday, as S&P 500 futures pointed to a solid 1 per cent rise in the US benchmark on Tuesday, and Euro Stoxx 50 futures rose 1.3 per cent.

Oil prices showed new-found optimism, as WTI crude oil futures rising 2.3 per cent to $US69.78 a barrel, extending a bounce that started Monday after militias shutdown Libya’s biggest oilfield before a national election, forcing state-owned National Oil Corp to declare force majeure.

Similarly in regional stocks markets, Japan’s Nikkei 225 index rose 2.1 per cent, China’s Shanghai Composite rose 0.9 per cent, and the Hang Seng jumped 1.5 per cent.

The Australian market was led by the defensive health care sector. CSL rose 4.9 per cent as its $750m share purchase plan opened, Cochlear added 3.9 per cent and Ramsay gained 3.1 per cent.

But cyclicals were also strong. Rio Tinto rose 3.5 per cent as Singapore iron ore futures rose 3.3 per cent to $US128.55 a tonne, NAB added 0.7 per cent and Washington H Soul Pattinson jumped 3.7 per cent. Travel stocks bounced, with Flight Centre up 3.9 per cent and Webjet up 3.2 per cent.

Wafer thin markets mean that any serious fund manager will have already set their portfolios.

But a lack of liquidity may work in the market’s favour if the risks are mostly priced in.

“In our view, the fear of another shutdown has likely happened underneath the surface and the last few sessions are going to go a long way in creating excessively pessimistic sentiment that generates at least a temporary oversold bounce,” said Canaccord US equity strategist, Tony Dwyer.