By Ryan Vlastelica
NEW YORK (Reuters) - This year's miracle won't be limited to 34th Street. It will spill onto Wall Street as well.
The recent agreement to extend the Bush-era tax cuts will help lift the markets in the final weeks of December, analysts say, with retail stocks expected to be among the top beneficiaries.
Late-year advances, known as "Santa Claus rallies" because of their proximity to Christmas, occur on a seasonal jump in bullish sentiment, as well as window dressing -- a strategy used by fund managers to improve the appearance of their funds by chasing strong performers.
It helps that stocks are already on an uptrend, with the Standard & Poor's 500 Index trading at two-year highs.
Increased sentiment "is not totally uncommon at this time of year," said William Delwiche, an investment strategist at Robert W. Baird & Co in Nashville. "Year-end and holidays tend to make people cheerful and optimistic about the new year."
The gains, which can be amplified by the period's light trading volume, have helped make December an historically strong month.
According to Thomson Reuters Datastream, the S&P 500 has gained an average of 1.5 percent in December since 1975, the third-best month behind April and November. The index is up 5 percent so far this month.
"Santa Claus rallies don't come on specific catalysts so much as an intangible sense out there, and this year that sense is strong and to the upside," said Joseph Greco, managing director at Meridian Equity Partners in New York.
"The tax deal gave us a huge shot in the arm, we're seeing consistent strength in retailers, and it's possible that we could get a move of 2.5 (percent) to 3 percent up from here," Greco said.
NICE COMEBACK FOR THE CONSUMER
Sentiment on retail stocks has been bullish lately, thanks to encouraging reads on consumer spending in the holiday shopping season. Analysts said the tax deal is adding to that positive bias.
"For the first time in several years, the consumer is back in play, especially if the tax deal comes through the way it has been proposed," said Timothy Harder, chief investment officer at Peak Capital Investment Services in Denver, which has about $600 million in assets under management. "As that becomes more certain, companies that target consumers will see that benefit."
While Santa Claus rallies unofficially run in the final week of the year, some retailers have already racked up strong gains. Abercrombie & Fitch has surged 11.3 percent in December so far, while luxury retailer Saks Inc is up 6.8 percent.
Despite an expected positive end to the year, issues may resurface in January as traders return from vacation and trading volume increases.
"We'll see Santa in December, but then comes the 'January effect' when institutions and managers either take money off the table or really get involved," Meridian's Greco said.
According to Datastream, January is historically the fourth-best month of the year.
"I'm hopeful that once they get a read on how bullish things are, that'll stimulate them to keep things going."
(Reporting by Ryan Vlastelica; Additional reporting by Rodrigo Campos; Editing by Jan Paschal)