An old Wall Street maxim states: “If Santa Claus should fail to call, bears may come to Broad and Wall.” As defined by the Stock Trader’s Almanac, the Santa Claus indicator consists of the current year’s last five trading days and the new year’s first two days. The Santa Claus Rally period runs from Friday, December 22, through Wednesday, January 3.
Despite this well-turned phrase, our analysis shows that Santa seems to have a cloudy crystal ball. In the twelve years with a negative S&P 500 return for the Santa Claus indicator, the market was down only five times in the following year, a hit rate of almost 42%.
While Santa’s arrival provides limited forecasting ability, he does seem to bring good cheer most years, with the S&P 500 rising an average of 1.3% during those seven trading days since 1969. A 1.3% gain is equal to or better than the average performance for nine out of twelve entire months of the year since 1950! In addition, the S&P 500 is higher almost 78% of the time during the Santa Claus rally period, which is much higher than an average period. According to Ari Wald at Oppenheimer, typically, the S&P 500 gains only 57% of the time during a standard 7-day period and rises 0.2% on average. So Santa does really bring gifts and good cheer!
Historically, December is the third-best month for S&P 500 performance, so it is usually a robust period seasonally. So far, this December has been a winner, with the S&P 500 almost 3% higher month-to-date.
Interestingly, December returns have tended to be higher when the S&P 500 had a positive return year-to-date through November, according to Strategas. Conversely, December returns are usually worse when the S&P 500’s year-to-date returns through November are negative. It probably shouldn’t be surprising that short-term momentum tends to carry in December aside from the boost from any good tidings. In other words, this year seems to be following the historical script since it was a phenomenal year for stocks even before December.
Additionally, Strategas found that a strong November does not tend to rob us of a better December. Given the S&P 500’s outsized rise of 8.9%, it is essential to note that we haven’t opened all our gifts early, if history is any indication.
Despite December returns tending to continue the trend in place before the month begins, Santa Claus has been more resilient in spreading his cheer to Wall Street regardless of prior returns. In the fourteen years with negative performance for the S&P 500 since 1969, the returns during the Santa Claus Rally period have only been down in four of those years.
Time will tell if the seasonal market blessings arrive in 2023 or if recession fears and Federal Reserve meddling will let the Grinch spoil our bullish holiday. In any case, the odds favor investors remaining invested during the holiday season. If harvesting tax losses before year-end by selling any stocks with unrealized losses, probabilities favor remaining invested by using exchange-traded funds (ETFs) or other stocks as substitutes rather than staying in cash.
