Why stock investors shouldn't count on a "Santa Claus" rally this year

Why stock investors shouldn’t count on a “Santa Claus” rally this year

Investors, like children on Christmas Eve, expect Santa Claus to come down the chimney, walk to Wall Street and deliver the rewarding gift of a stock market rally.

This year, however, investors might be better off betting on a lump of coal, rather than waiting for tangible stock market gains to emerge this holiday season, market analysts said.

“The Santa Claus rally is canceled this year as the equity market navigates higher yields and declining earnings,” said José Torres, senior economist at Interactive Brokers. “The seasonal tailwinds that have traditionally driven Santa Claus rallies pale in comparison to the plethora of headwinds currently facing the stock market.”

US stock indices fell this week, with the S&P 500 SPX,
and the Dow Jones Industrial Average DJIA,
both posting their biggest weekly declines in nearly three months, according to Dow Jones Market Data. The decline came as stronger-than-expected economic data added to concerns that the Federal Reserve may need to be more aggressive in its battle against inflation than expected, even with flashing alarms about a possible economic recession.

See: Here’s what history says about stock market performance in December

Santa Claus tends to come to Wall Street almost every year, bringing a short revival during the last five trading days of December and the first two days of January. Since 1969, the Santa Rally has pushed the S&P 500 up 1.3% on average, according to data from Stock Trader’s Almanac.

“December is the most seasonal month of the year, especially in a midterm election year. So December was positive most of the time,” said David Keller, chief market strategist at StockCharts. .com “It would actually be very unusual for stocks to sell dramatically in December.”

Will Wall Street hold a Santa Claus rally?

A rotten year for financial assets has begun to end under a cloud of uncertainty. Given the Federal Reserve’s tough stance on reducing inflation to its 2% target and already volatile financial markets, many analysts believe investors shouldn’t focus too much on whether the Santa ends up being naughty or nice.

“Next week is going to be a huge week for the markets as they try to find balance before the end of the year,” Cliff Hodge, chief investment officer at Cornerstone Wealth, said in emailed comments Friday.

This makes the Fed’s rate decisions next week and new inflation data even more crucial for stock markets. Friday’s wholesale prices rose more than expected in November, dampening hopes of slowing inflation. The core producer price index, which excludes volatile food, energy and trade prices, also rose 0.3% in November from 0.2% the previous month. said the Labor Department.

The corresponding November Consumer Price Index report, due Tuesday at 8:30 a.m. EST, will further show whether inflation is falling. The CPI rose 0.4% in October and 7.7% from a year ago. The core reading rose 0.3% for the month and 6.3% on a yearly basis.

“If the CPI print comes in at 5% on the core then you’re going to get a real selloff in bonds and stocks. If inflation is still higher and you have a recession can the Fed cut its rates? Maybe not. Then you start getting into the stagflation scenarios,” said Ron Temple, head of U.S. equities at Lazard Asset Management.

See: Investors won’t see relief until 2024 in the form of Fed rate cuts, warns Credit Suisse

Traders are pricing in a 77% chance that the Fed will raise its key rate by 50 basis points to a range of 4.25% to 4.50% next Wednesday, the last day of its Dec. 13-14 meeting, according to the CME FedWatch. tool. That would be a slower pace than its four consecutive 0.75 point rate hikes since June.

See: 5 things to watch when the Fed makes its interest rate decision

John Porter, chief investment officer and head of equities at Newton Investment Management, doesn’t expect any surprises next week on the scale of the Fed’s interest rate hike. He predicts, however, that stock investors will be watching Fed Chairman Powell’s press conference closely for insight into the decision and “hanging on every word.”

“Investors are almost contorting themselves into a pretzel and trying to over-interpret the language,” Porter told MarketWatch by phone. “Listen to what they say, don’t listen to what you want them to say. They [Fed officials] will continue to be vigilant and they must monitor inflation.

Does the ‘Santa Claus’ rally really exist?

For years, market analysts have looked at potential reasons for Santa’s typical seasonal pattern. But with this year still awash in red, some believe a late-December rally could become a self-fulfilling prophecy, simply because investors might be looking for any reason to be a little cheerful.

“If everyone focuses on the positive seasons, it could become more of this narrative that drives things rather than something more fundamental,” David Lefkowitz, head of Americas equities at UBS Global Wealth Management, told MarketWatch per telephone.

“Markets tend to love the happy spending season so much, so there’s a name for the rally that tends to happen at the end of the year,” said Liz Young, head of investment strategy. at SoFi. “For what it’s worth, I think ‘Santa Claus Rally’ has as much predictive power as ‘Sell in May and go’, which is minimal and coincidental at best.”

The major events of the rescue rally

While all three major U.S. stock indexes posted steep weekly losses, stocks rebounded from October lows. The S&P 500 rebounded 9.9% from its October low through Friday, while the Dow Jones Industrial Average DJIA,
gained 16.5% and the Nasdaq Composite COMP,
advanced 6.6%, according to Dow Jones Market Data.

However, many top Wall Street analysts also see cause for alarm, particularly that the stock market’s rebound from recent lows is likely running out of room.

So are investors ignoring the warnings? Despite talk of the seeming inevitability of a year-end rally, several recent rally attempts have failed, while Wall Street’s CBOE VIX volatility index,
or “fear gauge,” was at 22.86 at Friday’s close. A drop below 20 on the VIX may mean that investors’ fears of possible market turbulence are easing.

US stock indices closed on Friday, with the S&P 500 losing 0.7%. The Dow Jones fell 0.9% and the Nasdaq 0.7%. Three major indices posted a week of significant losses, with the S&P 500 posting a weekly decline of 3.4%. The Dow Jones was down 2.8% and the Nasdaq Composite was down nearly 4% this week, according to Dow Jones Market Data.

Next week, shortly after the CPI and Fed decision, investors will also receive November retail sales data and the industrial production index on Thursday, followed by flash PMI readings from the S&P Global on Friday. .

– Joseph Adinolfi contributed reporting for this article.

See: BNP Paribas has studied 100 years of stock market crashes – here’s what it says is to come

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