One category of stocks is poised for a Santa Claus rally that will last well into January, according to a senior market analyst.
Nancy Prial, the CEO of Essex Investment Management, says she expects the rally will begin shortly after December 25 and quickly hit top gear.
“The most dramatic period of that will be the week right after Christmas and that first week in January before we start to hear any news about the December quarter,” Ms Prial told CNBC.
What will spark the Santa Claus rally?
A Santa Claus rally is a phenomenon that refers to a period of stock market gains that typically occurs over Christmas.
Ms Prial says one the drivers of this year’s rally will be the traditional end of year tax loss selling, which is when investors sell off underperforming assets in order to offset capital gains and reduce their tax burden. The end of this selling period can help to drive market gains as investors look to buy back into the market.
In addition, she believes the rally will be fuelled by a reversion to the mean, which refers to the tendency for stock prices to return to their long-term average after periods of extreme volatility.
Finally, Ms Prial says the lack of news during the holiday season could also contribute to the Santa Claus rally, as investors may feel more confident about making investment decisions in the absence of any major market-moving events.
Which stocks will rally this Christmas?
Ms Prial believes that this year’s Santa Claus rally could be particularly strong for small cap sectors of the market.
“We’ve seen tremendous weakness in the smaller cap sectors of the market (and) we believe small cap stocks are much more than adequately discounting the recession that we are in fact likely to have,” she said.
“Small cap stocks … are selling at a 30 year low relative to large cap stocks.
“We think that is way overdone, particularly in an economy that will be led by the kind of factors that tend to be very favorable for small cap stocks.
“Fundamentals are going to matter next year, revenue growth is going to matter, margins are going to matter and making money and returning that to shareholders is going to matter, and that’s all good for small caps.”
Things will be “very different” next year
M Prial believes markets are about to change in fundamental ways.
For the past decade or so, they have been largely driven by the internet, media, and technology sectors, but she thinks we are entering a new era where industrials and manufacturing will take the lead.
This shift could create new opportunities for small cap stocks, which are often more closely tied to these sectors.
“We believe that the market is coming to grips with a world that is going to be very different for the next couple of years that what we’ve seen for the last 10-12 years,” Ms Prial said.
“So it’ll be a different market, but it could be a good market.”
Buyer beware
Of course, none of this means that the market as a whole will be smooth sailing from here on out.
There are still many uncertainties and challenges to be faced, however according to Ms Prial, we are entering a different market environment with new opportunities that could help to fuel the Santa Claus rally and drive continued gains in the weeks and months ahead.