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Will "Santa Rally" 2020 Be Unusual? 5 ETFs to Stay Steady

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The U.S. market is in great shape as 2020 is nearing its end, thanks mainly to vaccine and stimulus optimism, a dovish Fed and slowly dissipating global growth worries. The S&P 500, the Nasdaq and the Dow Jones are hovering around record highs as the Santa rally is keeping Wall Street charged up.

What Is Santa Rally?

Santa Claus rally refers to the jump in stock prices in the week between Christmas and New Year's Day. There are several factors behind this surge including "tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week" per Investopedia.

In fact, some even believe that investors buy stocks during this period to cash in on another strong equity event, known as the January Effect, which takes place soon after. According to Stock Trader’s Almanac, there has normally been “a short, sweet, respectable rally within the last five days of the year and the first two in January.”

There has been an average 1.3% gain since 1950 and it has offered positive returns about 75% of the times since 1969, per a source. Not only this, December is historically a gainful month. Since 1945, the S&P 500 rose nearly 1.5% in all Decembers and gained in price 73% of the time, according to Sam Stovall at CFRA Research, as quoted on CNBC.

Will Santa Rally 2020 be Unusual?

But after a massive global market rally in November, we believe that “hopes for the usual “Santa Claus rally” may have to be tempered a bit this year,” along with many other analysts. The S&P 500 in November was up 11.2%, marking the fourth biggest advancement of all time but only the second biggest gain this year, after April, with a gain of 12.7%, CNBC noted.

Sentiments have been pretty upbeat in the fourth quarter on anticipation that 2021 could be a smooth year on vaccine rollout. But investors are probably underestimating the availability of vaccines on a broad-based basis and the extent of spread of Covid in winter (which could mean some restricting measures).

Stimulus hopes are rife but it could be smaller in size once rolled out. Markets may not cherish those lower-than-expected likely stimulus checks especially after the move is already priced-in.

Earnings growth estimates (11.3% expected decline) for Q4 are down marginally from the preceding week, per the Earnings Trends issued on Dec 16. This could be due to rising virus cases, which in turn weighed on the recent economic data points. Jobs, retail and manufacturing –have all put up a somber show lately.

Still, we highlight below a few ETFs that could offer support to your portfolio even if there is a less sturdy Santa Rally.

ETFs That Should Stay Steady

Quality ETFs

In this scenario, investors can play Fidelity Quality Factor ETF (FQAL - Free Report) for some quality and safer exposure. The fund is up 15.8% this year and has added 4.1% gains past month.

Undervalued Tech ETFs

Virus or no-virus, the tech sector is set to rule ahead. Still, it would be prudent to focus on low P/E tech ETF after a monster rally this year. iShares Cybersecurity and Tech ETF (IHAK - Free Report) is up 42.9% this year and is still has the least P/E of 19.76X in the tech space.

Value ETFs

With rising rates in the United States thanks to the vaccine hopes, the beaten-down corner of the market this year, value stocks may gain ahead. SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) can thus be looked upon.

Small-Cap ETFs

This was yet another beaten-down corner of 2020. However, the dissipating growth issues should make iShares Russell 2000 ETF (IWM - Free Report) a prominent bet ahead as full-fledged lockdown is not expected at the current level. And small caps benefit from a domestic economic recovery.

Electric Vehicles ETFs

This is an emerging area. The fund Global X Autonomous & Electric Vehicles ETF (DRIV - Free Report) is up 58% this year and has added 12.3% past month. This year, electric car makers Tesla and Nio have recorded a strong show. Joe Biden’s win will also keep the space charged up in the near term.

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