The time between Thanksgiving and Christmas is seasonally the best performing period for stocks with an average gain of 2.8% over the past 50 years. However, with the major indices already logging record gains — during the first three weeks of November — will the current ‘Santa Claus rally’ turn into a turkey? 

Spoiler Alert: I’ll list some potential headwinds because it’s always important to consider potential risks. I remain bullish and expect new highs to be made by the end of 2020. 

With COVID-19 vaccines coming, the bull case is pretty clear — the recent run-up has been broad and well-led by riskier stocks, profit expectations have turned up, and the credit markets are in a giving mood. The obstacle in this upbeat set-up is the burden of record coronavirus-case growth and the economic drag of health-related suppression measures. But, the past three weeks have shown that the market’s looking past the virus as the reopening stocks — or those hardest hit by Covid related shutdowns, such as travel, leisure, and energy have surged to new highs. All while big-cap tech has benefited from an accelerated shift to digital stagnated. 

As a simple proxy for this rotation, the chart below compares the Russel ( IWM)  (black line) to the Nasdaq 100 (QQQ)  (candlesticks). 

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While the bull case seems clear and the buying inexorable, there are less-apparent hurdles the bulls will have to clear over the next several weeks related to the broader supply and demand for stocks. Asset reallocation could be one headwind. Ironically, stocks, which have sharply outperformed bonds this month, places pension funds and other asset allocators in a position to be fairly heavy equities sellers into the end of November or December.

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There are varying estimates on the magnitude of pension rebalancing.  However, the consensus is hovering around $75 billion with it coming out of equities and into bonds. This can certainly be absorbed by the $30 trillion market of U.S stocks. But it does take away some firepower for a raucous year-end rally.  Secondly, there’s very little dry powder or cash on the sidelines as hedge funds and other tactical professionals are pretty close to being ‘all in.’ Last week, the Evercore ISI survey of hedge fund managers last week indicated its net exposure to equities near a three-year high.  Likewise, retail investors — the driving force in some of the most speculative names — have already generated the largest two-week cash flow into equity funds at over $70 million, according to Bank of America.

Lastly, new issuance, be it IPOs or secondaries by cash-strapped companies such as cruise and airlines, tapping into the buoyant market to raise cash, is also at a record pace.  And the SPAC phenomenon, which has already raised some $60 billion, shows no sign of slowing. Now that I’ve cited some potential drags,  I’ll note all of them are incremental or occur on the edge.  I don’t think they’ll be big enough obstacles to derail the bull market. 

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