Almost as predictable as the jolly tycoon himself, many on Wall Street are looking forward to the so-called Santa Claus rally that will further fuel a stock market rally that already has investors in the holiday mood.
as defined Stock Traders YearbookThe Santa Claus Rally refers to the tendency of the stock market to rise during the last five trading days of the current calendar year and the first two trading sessions of the new year. The period starts on Friday, and this time it will end on Wednesday, January 3rd.
If recent history is true, stocks should do well over the next six business days, as Santa Claus tends to come to Wall Street almost every year. Since 1950, Santa Rally has boosted the S&P 500 SPX by an average of 1.3% over a seven-day period. According to Dow Jones Market Data, the benchmark large-cap index has closed higher than Santa Claus in 78% of its trading windows over the past 75 years, rising in the past seven years during that time.
But this time, the stock market is already in a party mood ahead of Christmas, with some market watchers, including Ed Yardeni of Yardeni Research, saying Santa’s rally happened “ahead of schedule.” thinking.
At the end of a roller-coaster year, U.S. stocks continue to make big gains. The S&P 500 rose 4.3% in December, up from nearly two years ago, amid growing optimism that the Federal Reserve could begin cutting interest rates as early as the first half of 2024. That was just 0.7 percentage points shy of the previous record, but policymakers tried to rein in the enthusiasm. Since last week’s FOMC meeting.
opinion: Santa Claus is coming to town and bringing gifts to your stock portfolio
But Pete A. Biebel, senior vice president and senior investment strategist at Benjamin F. Edwards, said the relentless build-up toward an official Santa rally raises the possibility that some of Santa’s gifts may have already been delivered. He said that it shows.
“I think the market is extending a little bit, so expectations for this traditional Santa Rally period need to be dialed back a little bit,” Biebel told MarketWatch on Friday.
Biebel noted that Wednesday’s midweek decline sent the Dow Jones Industrial Average DJIA down 475.92 points, or 1.3%, its biggest single-day decline since October. The blue-chip index ended its streak of five consecutive all-time highs as its strong year-end rally temporarily lost steam, according to Dow Jones Market Data.
The underlying cause of the decline was not clear, but some Wall Street analysts believe a surge in zero-day-to-expiration option (0DTE) trading was responsible for the decline. Overbought technical conditions and low trading volumes at the end of the year were also cited as likely contributing factors, with some saying derivatives, which have exploded in popularity this year, are just one piece of the puzzle.
Biebel said Wednesday’s “air pocket” in stock prices was a harbinger or red flag that the market had the potential for a significant decline. “It doesn’t mean it has to happen, but it’s a warning that the market isn’t as rosy as it seems and there are potential problems beneath the surface.”
look: Do you want to chase Santa Rally? Take a look below!
But Adam Turnquist, chief technical strategist at LPL Financial, said some analysts are warning investors that seasonal momentum could be a challenge, especially in a strong uptrend bull market that has pushed the three indexes off their October lows. It suggests that one should not bet against it.
“Stocks are overbought, but the market could remain overbought for longer than most expect, especially at this stage of the bull market,” Turnquist told MarketWatch by phone.
On the other hand, stock market returns during this period have historically been closely correlated with returns in January and the following year. Since 1950, when Santa comes to town, the S&P 500 has generated his average annual return of 10.4%. That’s significantly higher than the return if Santa never showed up, which would be only about 4%, according to data compiled by LPL Financial.
“There is a possibility [for a Santa rally] “However, given these overbought conditions, there is likely to be a bit of a hangover and a reset in January or February,” he added.
Only time will tell whether investors will receive the seasonal gift that history has promised them in 2023, or whether the Grinch will steal Christmas in an overly prolonged bull market. At the end of the day, Biebel said, the Santa rally is more of a “curiosity” than a phenomenon.
US stocks rose slightly on Friday, with the three major indexes in positive territory for the eighth consecutive week. The Dow Jones Industrial Average rose 0.4% this week, the S&P 500 rose 0.9% and the Nasdaq Composite Index rose 1.3%, according to FactSet data.
