Every time I turn on the TV there is another bullish market strategist talking about the Santa Claus rally. This morning it was Raymond James’ Jeff Sault. I have no bones to pick with Jeff, he seems like a decent enough fellow. But I want to take a moment to point out the Santa Claus rally does not technically entail all of December.
The Santa Claus rally was first described as the “December effect” in Yale Hirsch’s 1972 edition of the “Stock Market Almanac.” Hirsch noted the tendency for the stock market to rise in the final week of the year. There was no mention of the whole month of December being positive.
Yet this tendency has somehow morphed into the “Santa Claus” rally that now entails all of December. Have a look at this typical article:
Although the author acknowledges the market typically rallies in the final week, the urge to highlight the whole month’s tendency to be positive is too great. And this “front running” of the “December effect” is all too common. Whether it is strategists such as Raymond James’ Jeff Sault or financial reporters such as the one above, the narrative always seems to suggest you better get in quick.
But how did this play out in the past? I took the the percentage returns over the last 10 years of the S&P 500, and created an average return chart during the month of December:
On average the stock market bottomed around mid December, and then rallied into Christmas. Of course every year was different, but this seasonality is much more consistent with Yale Hirsch’s original observation.
When you combine this tendency with the fact that this year we are on track for the first rate hike in almost a decade on December 16th, I would be surprised if we rallied for the next week. In fact, I think worry about this initial lift off will make the possibility of the “December effect” play out perfectly – just from much lower levels.
I expect the Fed to hike as dovishly as possible, but in the mean time, we will most likely head lower. Don’t get fooled into thinking you need to own the market for all of December to catch the Santa Claus rally.
Can we make it seven?
In the last month the S&P 500 has twice dipped to levels that would make it down on the year, but both times rallied back up.
We are precariously close to the unchanged level. You are probably saying to yourself, “Big deal. Who cares if we close higher or lower off some arbitrary level?” The reason I am following it so closely is the S&P 500 has NEVER closed higher seven years in a row.
If I had to guess, we will get another dip under the “even line” going into the December Fed meeting. It will then be a battle to see if they can accomplish the never being done before by closing it higher seven years in a row. Expect this stat to head to the forefront of investors’ psyches in the coming weeks.
Thanks for reading,