This is the time of year when the traditional seasonal rally in US equities known as the “Santa Claus rally” usually takes place. But unlike past holiday periods, this one could get bogged down in the risks of a recession and a continued rise in interest rates in the new year.
The Santa Claus rally refers to the tendency of the stock market to rally during the last five trading sessions of a calendar year and the first two sessions of the following year. Friday marked the start of the period, which will continue until January. 4 this time. Analysts said Investors shouldn’t count on stock market gains this holiday season, although some market participants are still holding out hope.
The story highlights how bullish this latter part of the year tends to be and how relatively rare it is to see stock market declines before and after Christmas. Seventy-two years of S&P 500 data SPX and its predecessor, the S&P 90, shows that only 15 to 16 holiday seasons have produced no rally. Of those seasons, seven were followed by first-quarter losses in the index, according to Dow Jones Market Data.
Read: End of year gathering? Stock market uptrend set to come up against stagflation fears
Any Santa rally to close out the 2022-23 season “will be very short-lived, and we’ll quickly return those gains because there simply won’t be a lasting rally with the Federal Reserve keeping interest rates high, a said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $3.1 billion from Mount Pleasant, SC
“It will probably be all of 2023 before inflation comes down and on top of that we have some big earnings revisions that need to happen,” Sterner said by phone. He said earnings per share could fall 15% to 20% on average, from currently estimated gains of 4% to 5% for next year, and the S&P 500 could retest its October low by around 3,500 in the first half of 2023 before.. ending the year flat.
Stocks have suffered in 2022, with the S&P 500, Nasdaq and Russell 2000 all posting double-digit percentages. decline, as the Federal Reserve continued to raise interest rates to stop inflation at its highest level in four decades. Dow industrials held up better, but were still down 8.6% year-to-date through Friday.
When stock market gains failed to materialize during Santa Claus time, the S&P 500 only averaged a 0.53% gain in the first quarter that followed, according to Dow Jones Market Data. This contrasts with the majority of times there have been gains during the holiday season, with the index producing an average 2.49% first-quarter lead thereafter.
This year “is definitely a good candidate for a Santa Claus rally, given how bad the sale is this year, but that doesn’t mean you’ll have a good year ahead of you, on average,” said Eric Diton, the Boca Raton, President and CEO of Florida-based The Wealth Alliance, which oversees $1.5 billion in assets under management and brokerage. “The biggest correlation is the January indicator, in which if you have a positive January, you have a higher probability of having a positive year.”
“If corporate earnings can hold up after this massive Fed tightening and the pretty big cut in money supply, the stock market should have a pretty good year,” he said over the phone. “If earnings pull back, we will have another leg down. My gut tells me we might have a mild recession, but I’m pretty optimistic for the second half of 2023: the Fed should be done raising rates by then, which will reduce the pressure on the market. »
The Dow Jones Industrial Average
DJIA,
and the S&P 500 index have each traded higher nearly 80% of the time during the seven-day holiday period since 1950, gaining an average of 1.38% and 1.32% respectively, according to Dow Jones Market Data. The Nasdaq Composite
COMP,
has traded higher 78% of the time since 1971, for an average gain of 1.81%, while the Russell 2000
RUT,
increased 71% of the time since 1987 and gained 1.5% on average.
Source: Dow Jones Market Data
If the Dow Industrials and S&P 500 finish higher for the 2022-23 season, it would be their seventh consecutive successful Santa Claus rally and their longest winning streak since the eight-streak that occurred between 1969-1970. and 1976-1977.
Source: Dow Jones Market Data
FactSet data shows analysts remain relatively optimistic about the direction of US equities in 2023: On Wednesday, their median estimate of the S&P 500 position 6-12 months ahead was 4,517.29, down from 3,845 at the close. of Friday. For the Nasdaq Composite, their median estimate was 13,577.30 against a close at 10,497.86 on Friday.
Given the lack of significant market news for the rest of the year, “conditions are definitely ripe for a rally right now which could coincide with what we typically experience around this time of year,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments in Atlanta, which oversees $2.5 billion. “With recessionary risks looming, sentiment has been pretty muted and there’s pessimism in the markets. When that’s the case, it can usually create some sort of rebound.
GLOBALT remains somewhat conservative in its stances, awaiting opportunities to pivot to a more aggressive stance, Buchanan said by phone. Meanwhile, market participants are waiting for what he calls a “blue sky” scenario, in which inflation falls further in 2023 and the Fed stages a soft landing by slowing the economy without putting millions of people Unemployed.
“The absence of a Santa Claus rally would set the tone in early 2023 for a market that needs little or no optimism to rally in the face of what many economists see coming: a recession. “, did he declare. Alternatively, a Santa Claus rally that comes to fruition “wouldn’t necessarily mean 2023 will be a bounce-back year, but could help the rest of January.”
The economic calendar is light in the week shortened by the upcoming holidays. The stock market is closed on Mondays in compliance with the day of Christmas, which falls on Sundays, and is closed again on January 1. 2 on the occasion of the New Year holidays.
On Tuesday, November’s goods trade data is due, along with October’s S&P Case-Shiller US House Price Index and FHFA US House Price Index.
Wednesday brings the pending home sales index for November. On Thursday, the first weekly jobless claims are released, followed the next day by the Chicago Purchasing Managers Index for December.
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