5 Of The Best Stocks To Buy On The Santa Claus Rally

The bull market that started in 2009 is expected to go strong this year. This optimism largely stems from the Santa Claus rally, which is being felt way ahead of Christmas. This year’s holiday season started on a solid note as consumers have stepped up their online purchases. But, it’s the Senate Republican’s approval of the rewrite of the U.S. tax code that is likely to drive the equity market higher.

Further, encouraging economic backdrop and higher consumer confidence in recent times also painted a rosy picture. Thus, it’s time to invest in solid stocks that are likely to make the most of the bullish sentiments.

December: The Best Month for Investors

Historically, the month of December has been the best for the S&P 500 investors. While it has been the second best for the Dow and the Nasdaq, the Russell 2000 index of small-cap stocks also tends to perform well starting mid-December going into January.

The table shows December’s monthly return for the S&P 500 from 1964-2016:

(Source: Topdown Charts, Thomson Reuters)

In fact, all the major indices more or less have yielded an average return of at least 1.8% in the final month of the year since 1987, per CNBC analysis using Kensho. This is entirely because of the Santa Claus Rally or the rise in prices in the final six days of the year. This term was first coined by market analyst Yale Hirsch in 1972 in The Stock Trader's Almanac.

But, many market pundits have been using the term to refer to the period from the beginning of December, or even as early as Black Friday, to Christmas. And this time around, markets have gained on strong holiday sales and, there you have it, a Santa Claus rally. Consumers have also shown confidence in their financial future and are prepared to spend more. This is usually what triggers a Santa Claus rally.

Santa Claus Rally Drives Holiday Sales

About 174 million Americans shopped during the Thanksgiving weekend, surpassing the estimated 164 million, according to the National Retail Federation. Cyber Monday, in fact, registered the largest online shopping day in U.S. history. Online sales crossed the $6.6 billion mark by the end of the day, reflecting a rise of 16.8% from the same period last year.

Lest we forget, around $5.03 billion was spent online on Black Friday, reflecting an uptick of 17% from last year. Small Business Saturday and Sunday (Nov 25 & 26) also recorded combined online sales of $5.12 billion, up 10% from the year-ago levels.

Senate Passes Sweeping Tax Overhaul Bill

The Senate voted 51-49 to approve the Republican tax bill. It’s a major policy change that will create big winners and help markets maintain the decade-long bull run.

The bill trims the corporate tax rate from 35% to 20%, marking the biggest one-time drop in big business tax rates. Banks face a high tax burden, which makes them big gainers when tax rates go down. Lower domestic tax rates will also result in repatriation of hundreds of billions of dollars in cash. This could help boost the economy and may cause interest rates to rise. Higher interest rates boost bank profits by increasing the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Let us also not forget, tech behemoths Apple Inc. (NASDAQ:AAPL) , Alphabet (NASDAQ:GOOGL) , Microsoft (NASDAQ:MSFT) , Cisco Systems (NASDAQ:CSCO) and Oracle (NYSE:ORCL) hold 88% of their money overseas to avoid paying the 35% corporate tax rate. Thus, they are positioned to gain immensely under Trump’s tax reduction plan.

As the Senate approved the tax bill, small-cap stocks will also tend to surge. After all, such companies have been paying taxes of more than 30% for quite some time, while their large-cap counterparts are paying close to 25%.

Gearing Up for a Solid End to 2017: 5 Buys

Courtesy of positive seasonal trend, solid holiday sales and Republicans’ approval of the nearly $1.5-trillion tax rewrite, we are lined up for a strong year-end rally. The economy had already seen the fastest growth in three years in the third quarter, which highlights its resilience toward devastating events like the recent hurricanes.

Hence, it will be prudent to invest in five of the best stocks in the market that can make the most of this bullish sentiment. Such stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Zacks Investment Research

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Written By: Zacks Investment Research