‘Santa Claus Rally’? Why investors should lower their expectations.
As predictable as it is jolly, many on Wall Street are eagerly awaiting the so-called “Santa Claus rally” that will further fuel the stock market rally that has already put investors in the holiday spirit.
As defined in the Stock Trader’s Almanac, the Santa Claus Rally refers to a tendency for stock markets to rise during the last five trading days of the year and the first two trading days of the new year. Friday marks the start of the period, which runs until Wednesday 3 January.
If recent records hold, stocks should perform well over the next six trading days as Santa Claus tends to visit Wall Street almost every year. Since 1950, the Santa Rally has lifted the S&P 500 SPX by an average of 1.3% over seven trading days. The benchmark large-cap index has closed more than 78% of Santa Claus trading periods over the past 75 years and has risen over the past seven years, according to Dow Jones Market Data.
But this time, the stock market was already in a party mood ahead of Christmas, and some market observers, including Ed Yardeni of Yardeni Research, thought the Santa rally was “ahead of schedule.”
U.S. stocks are seeing huge gains as they close out a roller coaster of a year. The S&P 500 rose 4.1% in December amid growing optimism that the Federal Reserve could start cutting interest rates as early as the first half of 2024, 0.9% below its record high set nearly two years ago. After the FOMC meeting last week.
opinion: Santa Claus is coming to town and bringing gifts for your stock portfolio.
But the persistent rally ahead of the official Santa Rally suggests some of Santa’s gifts may have already been delivered, said Pete A. Biebel, senior vice president and chief investment strategist at Benjamin F. Edwards.
“I think the market has expanded a little bit, so we have to temper our expectations a little bit for this traditional Santa Rally period,” Bibel told MarketWatch on Friday.
Bibel notes that Wednesday’s mid-week decline sent the Dow Jones Industrial Average DJIA down 475.92 points, or 1.3%, its biggest one-day decline since October. The blue-chip index ended its fifth consecutive record close as its strong year-end rally briefly lost momentum, according to Dow Jones Market Data.
There was no clear underlying cause for the sell-off, but some Wall Street analysts believe a surge in zero-day expiration options (0DTE) trading was to blame for the decline. Others said derivatives, which have exploded in popularity this year, are just one piece of the puzzle. Overbought technical conditions and low year-end volume were also cited as likely factors.
“Air pockets” in stocks Wednesday are a sign, or red flag, that the market may be headed for a sharp decline, Bibel said. “That doesn’t mean it has to happen, but it is a warning that the market is not as rosy as it appears. There could be potential problems beneath the surface.”
see: Are you following the Santa Rally? look down!
But some analysts are suggesting investors avoid betting on seasonal momentum, especially during a bull market when the three indexes are showing strong gains off their October lows, said Adam Tunquist, chief technical strategist at LPL Financial.
“Stocks are overbought, but the market could stay overbought for longer than most people expect,” Turnquist told MarketWatch by phone. “This is especially true during the current bull market phase.”
Meanwhile, stock market returns during this period have historically been closely correlated with returns in January and the following year. Since 1950, the S&P 500 has returned an average of 10.4% per year every time Santa comes. That’s much higher than the rate of return if Santa doesn’t show up (about 4%), according to data compiled by LPL Financial.
“There is a possibility (of a Santa rally), but we are likely to see a bit of a hangover and reset in January or February due to this overbought situation,” he added.
Time will tell whether investors will receive the seasonal gift history has promised in 2023, or whether an overextended rally will allow the Grinch to steal Christmas. In the end, the Santa Rally is more of a “curiosity” than a phenomenon, Biebel said.
U.S. stock markets closed mostly higher on Friday, with the three major indexes posting positive gains for the eighth straight week. The Dow Jones Industrial Average rose 0.2%, the S&P 500 rose 0.8% and the Nasdaq Composite rose 1.2% this week, according to FactSet data.
