Should You Even Care About The Santa Rally?

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Deck the halls, because it’s the most wonderful time of the year – on Wall Street. 

Well, that would most likely depend on who you’re talking to, and whether you’re steering the conversation in a direction towards bullish sentiments over the ever-fantasized Santa Rally that makes an appearance once a year. 

Fund managers and investors are hopeful that the upcoming month and early days of January could provide them with a major upside, as they shrug off earlier losses and navigate the potential hard realities of investing in a market fraught with stick inflation, high-interest rates, and under-valued stocks. 

Each year, the Santa Rally brings a hopeful chime to the ears of Wall Street, a seemingly accurate, and well-documented financial phenomenon that started back in 1972. 

See, back in the early 1970s, Yale Hirsch, creator of Stock Trader’s Almanac noticed a seasonal pattern in the stock market that typically occurs during the last five trading days of each year, and continues into the first two or three trading days of the new year. 

What Hirsch realized is that during these few days, stock market performance tends to swing upwards, more by marginal increments than those movements we witnessed at the beginning of the technology and software bubble. 

For instance, some Wall Street analysts and experts estimate that during the Santa Rally, the S&P 500 generated an average return of 1.3%, compared to the average 0.2% return for all rolling seven days prior.

For those who are new here, think of the Santa Rally as the last call on the stock market before the close of the year. While some investors may be joyous over periods such as “Buy in May and Go Away” or the “Halloween Indicator”, the Santa Rally gives a much-needed boost to some portfolios that are aligned with bullish stock options and investment vehicles. 

Should you even care this year? 

Santa Clause aside, the stock market has remained fairly bullish in the last several weeks, starting a trend that has picked up steam during the early days of November already. Wall Street has been clapping and chanting along ever since, hoping to continue this bullish streak well into next year. 

However, this year might be different, and some investors and fund managers may end up with a lump of coal, instead of those high returns they’ve been wishing for all year. 

See, the thing is, this year could be different in a few ways. For starters, interest rates have climbed faster and higher in a very short time. As Jerome Powell and the Federal Open Market Committee (FOMC) try and pump the brakes on the economy, other parts of the economy have been bleeding, calling for them to release some pressure. 

10-year U.S. Treasury yields rose by a massive 64 basis points, moving from 4.82% in July, to a record high of 5.00% by mid-October. At the end of the first week of December, the 10-year yield was 4.14%, while last year this time, the rate sat at 3.42%.

So what does this mean? 

Well, looking at these rates, investors could be dropping their cash on Treasuries instead, seeing that these yields are far more attractive than the 1.50% the S&P 500 has been offering during the same week in December. 

The chain reaction would cause investors to increase their allocation for fixed-income, lowering their exposure to equity allocations, and ride the wave until Powell and the Federal Reserve allow for the central bank to blow off some steam. 

Yet, this is perhaps a far cry from happening. Word of mouth is, and if you haven’t read this already, the Federal Reserve might’ve calmed their monetary tightening, for now at least, but many experts are now calling for rates to remain higher for longer. 

Following this, the last quarter of the year has been met with tremendous geopolitical challenges across parts of Africa and the Middle East, not to forget about the ongoing conflict between Ukraine and Russia. 

While there is little that investors and fund managers can do about this conflict, many are keeping their fingers on the pulse, as further escalation, and the possible eruption of more conflict elsewhere could throw a spanner in the works for their Santa Rally. 

On top of this, slower economic activity, mostly led on by consumers retracting, and tightening their purse strings even further, a cooling job market, and slower wage growth are also making it harder for investors to navigate their sleigh through the snow. 

See, while the U.S. recorded the biggest and fastest quarterly economic growth since 2021, with third-quarter GDP readings coming in at 5.2%, and with annual GDP growth now expected to end the year at a 2.5% high, there are still some headwinds that could knock the breath out of these numbers. 

Although these are the figures that economists want to see, higher rights, a tight policy, and stringent lending could soon begin to shake the cage, leaving investors worried over the near-term side effects this might have on the stock market. 

While we may see this trend increase, or even decline over the coming months, one can’t sit and wonder for how long this will continue until we begin to see some cracks taking shape. 

Although there are some things to become excited about when we begin to approach the last month of the year, it’s not always that easy to predict whether current activity will set the stage for next year. 

More than this, looking at previous or historical data shows us that the Santa Rally follows a pattern, with stocks climbing to the top, before beginning to slide again in the new year. 

This only further leaves many questions unanswered for investors of where they should be parking their cash, and if they do, what are their best options considering the current micro and macroeconomic environment. 

Ask, but expect nothing 

The best thing to do is to ask, but expect nothing. Knowing that these cyclical patterns are only a once-in-a-year occurrence only places more risks on investors’ plates, something they already have enough of. 

It’s perhaps better left than done, but making a hardball attempt to win back any losses made earlier in the year could only set you back for next year, leaving you with little to start with. Instead, it might be better to sit back and let the bulls push and pull Santa across Wall Street this December.