Thanks for the Gains, but Can This Market Keep on Giving?

The holiday-shortened week ended with a bang, as news of a new COVID-19 strain overseas sparked worries over potential renewed lockdowns, with equity markets enduring the steepest daily decline in two months. Thin holiday trading volume likely exacerbated the reaction, but this is a reminder that despite the recent rally and still-favorable fundamental outlook, pandemic and policy uncertainties still pose credible risks to the market's tranquility in the near term.

Even with last week's dip, it should not be lost that equities are up sharply so far this year. If the S&P 500 were to finish at this level, it would be the fifth-best yearly gain in the last two decades. Thanksgiving marks a turn into the homestretch for the year and shifts the attention to the holiday shopping season. With that in mind, we've dished up some holiday perspectives on market performance and the role the consumer is likely to play as we advance.

Post-Turkey Track Record: No Nap Required

  • The stock market has historically done well after Thanksgiving. Since 1950, the S&P 500 has risen by an average of 1.5% in December, logging a post-holiday gain more than 80% of the time. And when the market rose between Thanksgiving and year-end, three-quarters of the time it went on to deliver a gain in the following year.1 In other words, a positive finish to the year has often set the table for a continued move higher.
  • Going back to 1950, the market has come into Thanksgiving with a year-to-date gain of 20% or more 19 times, including this year. The average return in the following year was more than 18%1. We don't expect 2022's gains to be quite that high, but this demonstrates that strong years don't have to be followed by disappointing ones.
 This chart shows the S&P 500 return by month, which has been positive the last 3 months.

Source: Bloomberg , S&P 500 Index Price, past performance is not a guarantee of future returns

This chart shows the S&P 500 return by month, which has been positive the last 3 months.

Consumers Have a Full Plate

  • Thanksgiving has historically ushered in the holiday shopping blitz with Black Friday. While still an important (and symbolic) day, consumer-spending habits have evolved, including increased online shopping as well as holiday sales outside of the traditional Thanksgiving-to-Christmas window. While supply-chain disruptions could lead shoppers toward in-stock items at physical stores this year, we think overall spending will see a healthy increase. The National Retail Federation (NRF) is forecasting an 8.5%-10.5% increase in holiday sales this year, compared with 2020.
  • The latest reading shows the personal savings rate is 7.5% (savings as a % of disposable income), the third-highest rate coming into Thanksgiving in the last quarter century. While this is down dramatically from the spike during the pandemic lockdowns (when consumers were unable to consume), the savings rate remains notably above the long-term average of 6.5% (6.1% excluding 2020). We think elevated savings will be drawn down, representing additional dry powder that will power consumer-spending growth for an extended period.
  • At 4.2%, wage growth is now the highest it's been since Thanksgiving of 2007, providing additional fuel for consumers2. Looking back over the last 25 years, when wage growth was above 4% and accelerating, GDP growth averaged 3.2%, compared with an average of 2.5% over the entire period.
 Chart showing initial spike and decrease in personal savings as the virus took hold

Source: St. Louis Fed, Atlanta Fed Wage Tracker

This chart shows the initial spike and decrease in personal savings as the virus took hold while wage growth us climbed amid a tight labor market.

A Good Recipe, but Watching for a Sugar High

  • The recipe for the recent rally should support markets again in 2022… The combination of above-trend GDP growth and mid- to upper-single-digit corporate profit growth will, in our view, maintain a solid foundation for the bull market to build upon next year. Of particular importance to household consumption will be further improvement in the labor market. Labor shortages remain a headwind, and renewed restrictions stemming from the new COVID-19 strain could extend the dislocation. However, recent employment indicators – including a new post-pandemic low in initial jobless claims reported last week – support our view that the labor market will continue to strengthen as we advance through 2022, including a further decline in the unemployment rate from the current 4.6%. Since 1950, when unemployment was below 4.5% at Thanksgiving time, the average increase in consumer spending (which accounts for 70% of GDP) in the following year was 3.1%. The average increase in the S&P 500 in the following year was 5.4%.3
  • …but future gains are unlikely to be as sweet. Despite last Friday's negative reaction to the latest COVID-19 developments, the pendulum of market sentiment has been firmly in optimistic territory lately, as reflected by just a single 5% pullback in 2021 and well-above-average stock-market gains. With pandemic threats reemerging at the same time that the Fed is embarking on a path of reducing monetary stimulus, we doubt markets will remain so optimistic in the year ahead. To us, this doesn't mean the bull market is facing its demise, but it does mean the recent exceptionally low stock-market volatility and 20%-plus annual gains won't be replicated as we advance.

Sources: 1. FactSet, S&P 500 Index total return. 2. Atlanta Fed Wage tracker. 3. Bloomberg, S&P 500 Index price return.

Craig Fehr,
Investment Strategist

Weekly market stats

Weekly market stats
Dow Jones Industrial Average34,899-2.0%14.0%
S&P 500 Index4,595-2.2%22.3%
MSCI EAFE *2,296-2.1%6.9%
10-yr Treasury Yield1.49%0.0%0.6%
Oil ($/bbl)$68.73-9.5%41.7%

Source: Factset. 11/26/2021. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *4-day performance ending on Thursday

The week ahead

Important economic data being released this week include the employment rate and the PMI index.

Review last week's weekly market update.

Craig Fehr

Craig Fehr is a principal and the leader of investment strategy for Edward Jones. Craig is responsible for analyzing and interpreting economic trends and market conditions, along with constructing investment strategies and and asset allocation guidance designed to help investors reach their financial goals.

He has been featured in Barron’s, The Wall Street Journal, the Financial Times, SmartMoney magazine, MarketWatch, the Financial Post, Yahoo! Finance, Bloomberg News, Reuters, CNBC and Investment Executive TV.

Craig holds a master's degree in finance from Harvard University, an MBA with an emphasis in economics from Saint Louis University and a graduate certificate in economics from Harvard.

Read Craig's Full Bio

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