Time is running out for Santa Claus to bring a rally to Wall Street, but not everyone has given up hope, even though the market has been uncertain and volatile until the very end.
According to LPL Financial, major stock indexes closed lower on Wednesday, with the Nasdaq-100 reaching its lowest level this year, casting doubt on the so-called “Santa Claus rally,” which has occurred 79% of the time since 1950. A rally across the major indexes on Thursday resurrected what turned out to be false hope for the late, short-lived rally that some saw as a foreshadowing of what was to come in the new year. On Friday, the last trading day of the year, indices fell once more.
But we still have two days to make up for lost time. The Santa Claus rally usually occurs in the last five trading days of the year and the first two days of the new year. The benchmark Standard & Poor’s 500 stock index closed at a record high of 4,796.56 on the first day of trading in January 2022.
“It is our first seasonal indicator of the year ahead,” wrote Jeff Hirsch, editor of the Stock Trader’s Almanac & Almanac Investor Newsletter, which predicts stock moves using historical patterns and market seasonality, among other factors. “Years with no Santa Claus rally tended to precede bear markets or times when stock prices fell significantly later in the year.”
What exactly is the Santa Claus Rally?
Hirsch, whose father Yale Hirsch discovered and named the Santa Claus rally, said the Santa Claus rally usually occurs during the last five trading days of the year and the first two of the new year and is usually good for about 1.3% on the S&P 500 index.
“If Santa Claus does not call,” Yale famously and succinctly stated, “bears may come to Broad and Wall.”
That is supported by data. If Santa brings a rally, the S&P 500 gains 1.3% in January and 10.9% in the new year 75.4% of the time, according to LPL.
If Santa does not appear, the S&P 500 historically underperforms in January and the following year. According to LPL, the S&P 500 drops 0.3% on average and returns only 4.1% in the new year 66.7% of the time.
But, after such an unusual couple of years, does the Santa Claus rally still matter?
The Santa Claus rally is not without flaws. It’s just another indicator that some will use to forecast stock market movements.
Even if Santa does not come, some analysts are still optimistic about stocks in 2023.
“Let’s not forget that (Federal Reserve Chairman) Jay Powell ruined a Santa Claus Rally in 2018 when he got very hawkish and talked rates up, and then the market basically went into a bear market until Christmas Eve,” said Nancy Tengler, CEO and CIO of Laffer Tengler Investments. “I’m expecting, and I’m hoping for, a rally, but we don’t know when we’ll get it.”
Following the absence of a Santa Claus rally in 2018, the S&P 500 returned approximately 30% in 2019.
A Santa Claus rally pushed the S&P 500 up nearly 5% between December 20, 2021 and January 4, 2022, with the index setting a new closing high on the first trading day of the year. Nonetheless, the S&P 500 is down about 20% year to date.
There are also competing patterns in 2023, which is the third year of the presidential cycle with the mid-term election year, historically the weakest of the cycle. According to LPL Financial, the third year of a presidential cycle has an average return of 16.8% versus 6.0% in year two. Furthermore, the first quarter of year three of the presidential cycle has been the strongest of the four quarters that year, according to the report.
What will be important for stocks in 2023?
Earnings and the Fed are two examples.
“I believe January will be a test for the market,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “Earnings will dominate, and the Fed will meet (to determine interest rates) Jan 31-Feb 1,” he added. “If earnings fail to materialise, we could quickly test the 3550 level” in the S&P 500 index. The S&P 500 ended the day near 3,840.
Investors should keep in mind that “the market is subject to negative headlines just as much as positive headlines can underpin a rally,” according to Quincy Krosby, chief global strategist at LPL Financial. “If today’s rally turns into a more substantial bounce, most likely traders will take profits quickly as they lock in last-minute gains following a difficult December,” and “a more forceful rally” is less likely.
