How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter

The S&P 500 on average drops 0.3% and returns only 4.1% for the new year 66.7% of the time, LPL said. “The Santa rally is real,” and it could give your portfolio a boost between the end of this year and the start of 2022, according to an analysis from Bank of America. Coined by Yale Hirsch, founder of the Stock Trader’s Almanac, the Santa Claus Rally describes what happens over the last five trading days of the year and the first two of the next. Cramer said he thought Fed chief Jerome Powell “threaded the needle” during his Wednesday press conference and helped spark the afternoon stock rally.

Only the Nasdaq Composite reported a loss in one year during the same period. A larger-than-expected increase in interest rates or signs that inflation was hotter than anticipated could fuel stock-market jitters toward year-end. The Federal Reserve is poised to continue its cycle of raising interest https://1investing.in/ rates during a policy meeting next week. The central bank began raising borrowing costs aggressively in March this year to tame stubbornly high inflation. The market generally responds positively to divided government due to the relative predictability that comes with legislative gridlock.

The benchmark index gained about 17% during the first eight months of 2023. Furthermore, falling used-car prices indicate that inflation pressures are easing, he added. That could in turn reduce pressure on the Federal Reserve to raise interest rates further – a prospect that would be favorable for stocks. “On Sunday, we observed that September is a good month for picking apples. It is widely viewed as a rotten month for stocks, which has been true for 55% of Septembers since 1928,” Yardeni said in a note to clients. For the believers, one can point to the zara net worth that occurred in the middle of the worst bear market since the Great Depression—the 2008 Great Recession.

Stock picks and investing trends from CNBC Pro:

“If earnings don’t pan out, we could quickly test the 3550 level” in the S&P 500 index. If Santa delivers a rally, the S&P 500 on average gains 1.3% in January and 10.9% for the new year 75.4% of the time, LPL said. Detrick also observed that a positive move during this period often came with strong returns over the month of January. Just because the Santa Claus rally does usually happen, and it often predicts the market the following year, that doesn’t mean it will continue to do so. If investors anticipate it, they are likely to behave differently, and market participants may adjust according to the expectation of a Santa Claus rally. “Midterm elections, no matter what, have a tendency to be very bullish, and the Santa Claus rally continues through the next three, six, 12 months,” he said.

Last week, the Bureau of Economic Analysis reported core personal consumption expenditures (PCE) — the Fed’s preferred inflation gauge — rose at a 4.7% year-over-year clip, or the fastest since 1983. As traders return from the holiday-shortened week, the price action heading into the new year will be closely monitored — especially given the relatively light economic data and earnings calendar for the coming days. Most long-term oriented investors don’t really need to spend much time obsessing over what may happen in the stock market over extremely short periods of time. Stocks usually rise over the last five days at the end of the year and the first two days of the following year. Based on the results since 1994, the behavior of stocks during the Santa Claus rally is also usually an accurate predictor of the direction of the stock market for the following year. Generally, the Santa Claus rally refers to the stock market’s history of rising over the last five trading days of the year and the first two market days of the new year.

Some, including economist Ed Yardeni are gearing up for poor results, while others think the market will be able to buck the trend this time. Since 1945, the S&P 500 has dropped 0.7% on average during the ninth month of the year, data from CFRA Research shows, with little consensus on why. Covering the future of finance, including macro, bitcoin, ethereum, crypto, and web 3. Burniske also says that a crypto bull cycle will require an increase in global market liquidity after it has contracted, which was likely the cause of the correction in the digital asset space. According to the crypto investor, the digital assets market will experience price volatility but eventually enter a bullish cycle.

How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter

Republicans took the House and Democrats retained control of the Senate in this year’s midterm elections. “That is a very small move, less than 1%,” Alec Young, chief investment officer at Tactical Alpha, told me. “That is a day’s trading. Even if we chop around for a few days, we can still do it.” The ultimate hope is that the markets remain choppy in the next few days but rallies going into the close of the year.

The Santa Claus rally typically happens during the last five trading days of the year and the first two of the new year. On the first day of trading in January 2022, the benchmark Standard & Poor’s 500 stock index closed at a record high of 4,796.56. According to Yale Hirsch, who first noticed the trend of stocks gaining at the end of the year, the Santa Claus rally refers to stocks moving higher on the last five trading days of one year and the first two trading sessions of the next year. By comparison, S&P 500 returns were a much smaller 0.24% during all other seven-day trading periods dating to 1950, Batnick said.

For the purposes of defining when the Santa Claus rally happens—to the extent it does—our research leads us to focus on the week before Christmas to document the potential Santa Claus rally effect. Observing the Santa Claus rally is one thing, but actually trying to profitably trade the so-called phenomenon is another matter. Financial columnists and traders like to opine on the likelihood of a Santa Claus rally. Some cite economic and technical analysis, and others offer pure conjecture.

• Looking at past price history, the week after Christmas is notoriously quiet and prices tend to move sideways in very narrow ranges.
• He predicted the US economy is set to crater by spring, causing a 25% plunge in the S&P 500.
• Republicans took the House and Democrats retained control of the Senate in this year’s midterm elections.
• December tends to be among the strongest months of the year for U.S. stock performance.

The risk/reward proposition (how much you’re likely to win on a winning day versus how much you could lose on a losing day) is also decidedly negative. Over the last 20 years, the average winning day was just +1.85% against the average losing day of -3.28%, making the Santa Claus proposition even less attractive. None of this is useful for most investors who do not have the trading experience to manage risk in such short time frames. For buy-and-hold investors and those saving for retirement in 401(k) plans, for example, the Santa Claus rally does little to either help or hurt them over the long term. It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish. A better strategy is to maintain a long-term investment outlook and not be tempted by the promise of Santa Claus rallies or the January Effect.

Stock market got a ‘Santa Claus rally’ after all

In the last 71 years, the S&P 500 index has risen annually by 1.3% over those seven days (on average), based on research from Michael Batnick, managing partner at Ritholtz Wealth Management, via CNBC. A similar occurrence happened in 2018 when another Santa Claus rally preceded a 29% broad index return in early 2019. As if Santa doesn’t have enough on his plate delivering gifts around the world in a single night, now he’s being pressured by Wall Street to cheer up the stock market. However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose. After Hirsch wrote about the pattern, it seemed to become part of the investing lexicon by the early 2000s when a number of references were made to the term in the financial media.

According to The Wall Street Journal, historically, the S&P 500, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite have risen about 80% of the time during the Santa Claus rally period. The average returns for the S&P 500, the Dow, and the Nasdaq Composite over the period have been 1.3%, 1.4%, and 1.8%, respectively. Several theories try to explain the Santa Claus rally, including investor optimism fueled by the holiday spirit, increased holiday shopping, and the investing of holiday bonuses. Another theory is that this is the time of year when institutional investors go on vacation—leaving the market to retail investors, who tend to be more bullish. Given such a small historical return, and a marginally positive frequency of occurrences, traders should be extremely cautious about buying or selling based on the supposed Santa Claus rally.

There are two schools of thought about the timing of the Santa Claus rally effect on the Standard & Poor’s (S&P) 500 Index. The first suggests the Santa Claus rally occurs in the week leading up to and ending with Dec. 24, Christmas Eve. The other scenario suggests the Santa Claus rally occurs in the week following Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. To the extent it exists, many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January Effect. Also, there is some research that points to value stocks outperforming growth stocks in the month of December overall.

Some of the theories that aim to explain both the Santa Claus rally and the January Effect have received criticism. Some analysts believe that it’s caused by the completion of tax-loss harvesting. Professional investors often adjust their portfolios at the end of the year for tax purposes by selling stocks at a loss. That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher. An example of a big Santa Claus rally occurred in December 2008 going into January 2009. A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Access and download collection of free Templates to help power your productivity and performance. Get this delivered to your inbox, and more info about our products and services. The PCE deflator gained 5.7% from the prior year, which is in line with consensus estimates from FactSet. Meanwhile, technology — which is the largest sector in the S&P 500, is flat because some of the largest stocks (particularly Apple) have done well.

What is the Santa Claus rally?

This rally brought some respite to the index that had, until then in the year, dropped more than 40%. For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month. The second is specifically the returns from trading the Santa Claus rally belief.

Over the last 20 years of following the Santa Claus rally proposition, the average return was only +0.385%, which we do not consider a viable trade opportunity for any but the most nimble of traders. However, a Santa Claus rally isn’t always an accurate predictor of gains the next year. In 2021, the S&P 500 gained 1.4% in the seven-day period, but the market peaked on Jan. 3 and entered a bear market in June, falling more than 20% as the Federal Reserve Board aggressively raised interest rates. It is the tendency for the market to rise in the last five trading days of the current year and the first two days of the new year. First discovered by Yale Hirsch of “Stock Trader’s Almanac,” it has produced positive returns 34 of the past 45 years for an average return of 1.4%.

Santa Claus Rally watch: What to know this week

The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. Looking at past price history, the week after Christmas is notoriously quiet and prices tend to move sideways in very narrow ranges. This makes sense if you think about it, as many market participants will take care of year-end position adjustments in the week before Christmas, while there is still plenty of liquidity. Further, this lull is most likely due to market participants taking the holiday break between Christmas and New Year’s. As such, for the purposes of this article, we will assign the week leading up to Dec. 25 as having the greatest potential for a “Santa Claus rally.”

If history is a guide, stock investors may be poised to get a gift over the holidays. Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains. “Equities can hold in here,” the Wharton professor said on the “Behind the Markets” podcast earlier this month. That’s because inflation is falling, meaning the Fed is less likely to hike interest rates. But despite September being an unfortunate month for stocks, it’s also a good opportunity to invest in cheap equities before a typical “year-end Santa Claus rally”, according to him.

Santa Claus rally

A Santa Clause rally is observed if the stock markets gain in the last five trading days of the year, going into the first two trading days of the following year. Depending on when weekends fall in a particular calendar year, the start of a Santa Claus rally could be before or after Christmas Day. Our analysis cited above suggests there is only a marginally positive opportunity in trading the so-called Santa Claus rally. The data that we examined shows a roughly 60-65% chance of a positive week in the run up to Dec. 25. Of the average winning day in the period, the return was +1.85%, while the average losing day was -3.28%.

There are also competing patterns coming in 2023, which is the third year of the presidential cycle with the mid-term election year, the weakest of the cycle historically, in the past. Since 1950, the third year of a presidential cycle has averaged a return of 16.8% versus 6.0% for year two, LPL Financial said. Additionally, the first quarter of year three of the presidential cycle also has been the strongest of the four quarters that year, it said. The window of time for the so-called Santa Claus rally is technically the final five trading days of a calendar year and the first two in January. Since late 1928, the S&P 500 has been positive in that stretch 78.5% of the time, according to Bank of America. Still, investors should be aware of how the market moves at different times of the year.

Conversely, the market has fallen in four of the following years of the six times stocks have declined during this stretch. It probably has something to do with a combination of optimism over the coming new year, increased spending over the holidays and the close of “tax-loss-selling season,” when traders and investors sell losing positions to minimize capital gains. Other factors include holiday and year-end bonuses and the expectation that a rally will take place in late December — because that’s usually the case. By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next.

For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000. Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. According to data compiled by Stock Trader’s Almanac in the 70 years between 1950 and 2020, a Santa Claus rally has occurred 57 times and has, on average, seen the S&P 500 go up by 1.3%.