Angry investors are expecting that a “Santa Claus rally” would lessen the pain of a difficult year for American stocks and possibly improve the picture for 2023.
The market really needs some holiday cheer. The S&P 500 (.SPX) has so far lost about 6% in December, a traditionally strong month for equities, as a result of steep falls in shares of Tesla Inc (TSLA.O), renowned Amazon.com Inc (AMZN.O), and other companies that had previously driven markets higher. The index has lost about 20% of its value so far this year and is on pace to have its worst performance since 2008.
The market does have a more likely and impactful chance of recouping those losses, based on history. Statistics from CFRA Research revealed US equities have increased roughly 75% of the time between the final five days of trading in December and the initial two trading days of January.
This pattern has been linked to low liquidity, the harvesting of tax losses, and the investment of year-end bonus.
If the Santa Claus Rally takes place this year, it will begin on Friday. Only after the second trading day in 2023 will it become obvious.
The Stock Trader’s Almanack estimates that since 1969, the phenomenon has increased the S&P 500 by a common level of 1.3%.
A weaker-than-usual year has typically followed a December without even a Santa rally, as per LPL Financial statistics going back to 1950.
When there has not been a Santa rally in December, the S&P 500 has typically gained 4.1% the following year, as opposed to 10.9% the year after.
Research showed January increases are also less robust in years without Santa Claus, with the index decreasing on average by 0.3% as opposed to rising by 1.3%.
When Santa Claus doesn’t show up, it usually implies that the market is experiencing some difficulty or misunderstanding. According to Keith Lerner, a co-chief investment officer of the Truist Advisory Services, the negative mood is unchanged by the start of a new year.
The sharp decrease this month highlights how seasonal trends appear to be countered by concerns over how the Federal Reserve’s tightening of monetary policy will send the economy into a downturn.
Since 1950, the S&P 500 has only experienced 18 Decembers with losses, according to data from Truist Advisory Services.
CFRA data recorded the index increased by a median of 1.6% in December, which was the largest monthly rise ever and more than double the overall average monthly increase of 0.7%.
One of the exceptions looks to be this December. A report released on Friday by BofA Global Research ran through investors who sold stocks at the greatest weekly pace ever in the week ending on Wednesday, for a net amount of $41.9 billion.
The “tax loss harvesting” approach, which entails selling assets at a deficit to offset capital gain taxes, was blamed for the sell-off.
According to strategists at DataTrek, the absence of a Santa Claus rally in this month and the “lump of coal selloff” that took its place are worrying signs for US equity returns in 2023.
The U.S. housing markets and unemployment claims data are the only two economic reports due the following week. With many Wall Street employees away for the holidays, stock market liquidity is anticipated to drop to close to its lowest values of the year.
The ability of inflation to continue to decline and permit the Fed to stop increasing interest rates earlier than expected will determine how the market will move in large part.
Although annual inflation surged at its weakest rate in 13 months and US consumer spending hardly increased in November, it is likely that this will not deter the Fed from raising interest rates in 2019.
Other gauges of inflation have also shown a slowdown, with consumer prices growing less than anticipated in November for the second consecutive month.
According to Sam Stovall, a chief investment strategist at the CFRA, if investors begin to notice that the economy is slowing more quickly than people are anticipating and the Fed stops raising interest rates in the first quarter, there may be a tale of two halves and a significant gain the following year.
