Year-end Santa rally could depend on the big week ahead for markets

The week ahead is so jam-packed for markets that it could determine whether there will be a smooth glide path for a Santa rally into the end of the year.

First, Congress looks set to fight down to the wire about a pandemic stimulus package, and chances are good it could again disappoint. The Fed also holds its final meeting of the year, and market pros are split on whether it will tweak its bond buying program when it issues its statement Wednesday. Since there’s a divided view, there’s room for market reaction either way.

Then there is lots of really meaty data, including November retail sales Wednesday, the Markit Purchase Manager Indexes and regional Fed surveys.

Finally, Tesla will be rolled into the S&P 500 at Friday’s closing bell, and that could bring its own fireworks as big investors lighten up on the other index stocks to make room for entrance of the electric car maker in their portfolios. That also happens on a day that could have its own built-in volatility — the quarterly quadruple witching expiration of options and futures.

“To me, the most market moving piece of information is, do we or don’t we get a stimulus package? The market has priced one in, so the biggest disappointment is if we don’t get one,” said Art Hogan, chief market strategist at National Securities. “The tug of war between the virus and vaccine had a tiebreaker in stimulus.”

Hogan said a positive could be if the Food and Drug Administration on Thursday votes to approve the Moderna vaccine, a week after it considered Pfizer’s vaccine. But it is really Congress the market is looking to now, and if it acts, it will be a market positive.

“I think that propels us into the year-end and higher levels. It only takes one of these things to pull over the apple cart, and the one that could matter is Congress not getting something out the door on stimulus. That would pull us back the hardest,” Hogan said.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said the expiration of unemployment benefits for millions of Americans at the end of December could push Congress to act.

“But you can’t ignore the strong stance the Republicans have taken on liability for business and the strong stance the Democrats have taken on state aid,” he said.

Tom Block, Washington policy analyst at Fundstrat, said he sees a 50/50 chance for a deal by the end of the week. If there is no agreement, federal unemployment benefits for millions and an eviction moratorium would expire at the end of the month.

Block said that even if Congress fails to immediately approve a bill to prevent a government shutdown, he expects lawmakers to reach an accord and keep the government running. But the stimulus is unclear, and much of it is a relief package.

“There’s a solution staring them in the face, and the record food lines are in red states and blue states,” he said. “Both sides seem to be unwilling to come to a deal on what they commonly agree on.”

Tesla’s entry into the S&P 500 is a much-anticipated event that traders expect to add some volatility to the market, as investors in the S&P index shift holdings. Tesla joins the S&P 500 on Dec. 21, at Friday’s closing price, and Friday has the potential to be a wild day .

“I don’t know if it creates volatility. It’s going to create a significant amount of frenetic trading which may have the aspects of volatility,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors. “Given we are interacting with a very high-volatility regime already, I think it wouldn’t take much to see the VIX spike.”

Bartolini said there was already a lot of trading activity expected with the expiration of options and futures Friday. “It’s just going to create more noise,” he said.

Tesla is the biggest company to join the S&P 500, and the rebalance Friday will be the largest ever. Tesla will be the seventh-largest stock in the S&P.

Index fund managers will have to buy upwards of an estimated $70 billion of Tesla, and that means selling the other S&P 500 stocks to make room. There will also be trading based on weighting adjustments in the index.

“What you will likely have is people naturally are going to buy Tesla and sell other shares. It could create some upward momentum in Tesla and downward pressure on the shares that are going out,” Bartolini said.

“It will be exciting. You’re going to see Tesla trade at significant volume.”

The Fed meeting will also be important, and it has been a hot topic of speculation, particularly in the bond market. Some market pros expect the Fed could make changes to its bond program. The Fed is currently buying at least $80 billion a month of Treasurys, and Fed officials have discussed what they could do to change that program at their last meeting.

There is now speculation that the Fed will hold the purchases at $80 billion a month, but change the type of securities it is buying, with more focus on longer-dated notes and bonds. That would theoretically hold rates down at the long end, but only about half of market participants expect the Fed to take action at this meeting.

The Fed also is buying at least $40 billion a month in mortgage-backed securities.

“It means at least half the market is going to be disappointed with whatever the Fed does or doesn’t do,” said Patrick Leary, chief market strategist and senior trader at Incapital. “That has the potential to cause some volatility, especially in the rates market, and potentially in risk markets.”

Stocks were choppy in the past week, with the S&P 500 down just about 1% at 3,663. Treasury yields moved higher in the past week but retrenched Friday, when the 10-year sank below 0.9%.

There’s a busy economic calendar in the week ahead. Weekly claims Thursday are expected to be closely watched after a surprise jump in people seeking new benefits for the week ending Dec. 5.

November Markit PMIs for the manufacturing and services sectors are released Wednesday, as is the November retail sales report.

Boockvar said he is watching to see how much the services sector is being impacted by the spreading pandemic and related shutdowns.

“I think the economic data is being overlooked for better or worse because it’s pre-vaccine,” he said.

Economists expect the economy is slowing and the labor market has been weakening, particularly since the virus spread has continued to accelerate. Some expect the first quarter to be weaker than the fourth quarter, but activity should pick up in the second quarter as the vaccine is distributed.

Monday

Electoral college votes cast for presidential candidates

Tuesday

FOMC begins two-day meeting

8:30 a.m. Import prices

8:30 a.m. Empire state manufacturing

9:15 a.m. Industrial production

4:00 p.m. TIC data

Wednesday

8:30 a.m. Retail sales

8:30 a.m. Business leaders’ survey

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Business inventories

10:00 a.m. NAHB survey

2:00 p.m. Fed decision

2:30 p.m. Fed Chairman Jerome Powell press briefing

Thursday

8:30 a.m. Initial jobless claims

8:30 a.m. Housing starts

8:30 a.m. Philadelphia Fed manufacturing

Friday

8:30 a.m. Current account