How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter

It’s that time of year when the traditional seasonal rally for US stocks known as the “Santa Claus Rally” usually takes place. But unlike past holiday seasons, this one is likely to falter in the new year due to recessionary risks and the continued rise in interest rates.

A Santa Claus rally refers to a stock’s tendency to rise in the last five trading sessions of a calendar year and the first two sessions of the following year. It started on Friday and will last until January 4 this time. Analysts said investors should not count on stock market gains this holiday season, although some market participants are still holding out hope.

History shows how bullish this last stretch of the year usually is, and how unusual it is to see the market decline before and after Christmas. Seventy-two years of data on the S&P 500 SPX and its leading index, the S&P 90, show that only 15 to 16 offseasons have failed to produce a rally. Of those seasons, seven followed first-quarter losses in the index, according to Dow Jones Market Data.

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Any Santa Claus rally to end the 2022-2023 season “will be very short-term in nature, and we will quickly give back those gains because there is no sustained rally with the Federal Reserve keeping interest rates high.” said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $3.1 billion from Mount Pleasant, SC.

“It will certainly be all of 2023 before inflation comes down and, on top of that, we have major revenue revisions that need to happen,” Sterner said by phone. He said that earnings per share could fall by an average of 15% to 20%, against current estimates of gains of 4% to 5% for next year, and that the S&P 500 could pass 3,500 in the first half of 2023. Try again in October. the end of the year is flat.

Stocks have suffered in 2022, with the S&P 500, Nasdaq and Russell 2000 all posting double-digit percentage gains. is declining, as the Federal Reserve has continued to raise interest rates to contain inflation, which is running at a four-decade high. The Dow industrials fared better, but were still down 8.6 percent through Friday.

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While stock gains didn’t materialize during the Santa stretch, the S&P 500 posted an average gain of just 0.53% in the first quarter that followed, according to Dow Jones Market Data. This is in contrast to most of the time when there were holiday season gains, with the index then generating a 2.49% first quarter improvement.

“The year is definitely a good candidate for a Santa Claus rally, given how bad sales have been this year, but that doesn’t mean you’re going to have a good year in general,” said Eric Diton, Boca Raton. President and Fla.-based managing director at The Wealth Alliance, which oversees $1.5 billion in assets under management and brokerage. “The bigger correlation is the January sign, where if you’re positive in January, you’re more likely to have a positive year.”

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“If corporate earnings can hold up after this massive tightening by the Fed and the massive reduction in the money supply, the market should have a very good year,” he said by phone. “If incomes flatten, we’ll be down another foot. My path says we might have a mild recession, but I’m very optimistic about the second half of 2023: The Fed should raise rates by then, pressure from remove the market.

Dow Jones Industrial Average DJIA,
+0.53%
and the S&P 500 Index each traded higher nearly 80% of the time during the seven-day holiday period since 1950, gaining 1.38% and 1.32%, respectively, according to Dow Jones Market Data. Nasdaq Composite COMP,
+0.21%
has traded higher 78% since 1971, for an average gain of 1.81%, while the Russell 2000 RUT,
+0.39%
it has increased by 71% since 1987 and has gained an average of 1.5%.

Source: Dow Jones Market Data

If the Dow and S&P 500 industrials finish higher for the 2022-2023 season, it will be their seventh consecutive Santa Claus rally and their longest winning streak since the streak of eight that occurred between 1969-1970 and 1976-1977.

Source: Dow Jones Market Data

Data from FactSet shows that analysts are relatively optimistic about the direction of U.S. stocks in 2023: As of Wednesday, their average estimate for where the S&P 500 will be six to 12 months from now is 4,517.29. was – down from Friday’s close of just 3,845. For the Nasdaq Composite, their average estimate was 13,577.30 versus Friday’s close of 10,497.86.

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Keith Buchanan, senior portfolio manager, said that given the lack of major news going on between now and the end of the year, “the conditions are ripe for a rally now that could be similar to what we typically experience at this time of year.” be consistent with it.” Atlanta-based GLOBALT Investments, which oversees $2.5 billion. “With downside risks looming, sentiment has been subdued and there’s pessimism in the markets. When that’s the case, it can often set up a range of volatility.”

GLOBALT remains somewhat conservative in its stance, while waiting for opportunities to shift to a more aggressive stance, Buchanan said by phone. Meanwhile, market participants expect what they call a “blue sky” scenario, in which inflation eases further in 2023 and the Fed engineers a slowdown in the economy without putting millions of people out of work. , produces a smooth descent.

“The failure of the Santa Claus rally will set the tone for a market in early 2023 that needs some optimism to rally against what many economists see coming: a recession,” he said. Additionally, a Santa Claus rally taking place “doesn’t mean 2023 will be a comeback year, but it might help the rest of January.”

See also: Is there a 2023 stock market rebound after the 2022 sell-off? What history says about the loss of the last years.

The economic calendar is light next week with a shortened holiday. The stock market is closed on Monday for the Christmas holiday, which falls on Sunday, and again on January 2 for the New Year’s holiday.

On Tuesday, November data on goods trade, along with the S&P Case-Shiller US home price index for October and the US FHFA home price index.

Wednesday is the pending home sales index for November. On Thursday, initial weekly jobless claims are released, the next day by Chicago purchasing managers for December.

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