Santa may not be coming to town because of the pandemic, but he will be making a socially distant visit to Wall Street stock traders if history is any guide.
Shares have performed exceptionally well during a seasonal period that includes the last five trading days of the year and the first two sessions of the new year, in what is known as the “Santa Claus” rally.
That period, starting on Thursday this year, is considered one of the best seven-day periods for stocks at any point in a year, with an average return of 1.3%, the second-best performance of a seven-day period in a year. year. year. The span also ended positively in nearly 78% of the roughly 250 trading sessions, Ryan Detrick, lead market strategist for LPL Financial, said in a Wednesday research note (table below).
Source: LPL Financial
Detrick says it’s not entirely clear why this period of December is proving to be such a good period on average from a historical point of view, but some speculate that institutions will have their books in order by the end of the year, consumer spending during the holidays boosting corporate sales , and investors on vacation and optimism for a year ahead could all be factors in the optimism that is spreading across financial markets.
“Basically, bulls tend to believe in Santa,” he writes.
It may be hard to believe that stocks will deliver a second slice of gains after a massive rebound from the March lows, when the coronavirus pandemic hit, and another rally to this point in December.
The Dow Jones Industrial Average DJIA,
is already up about 2% over the month so far, the S&P 500 index SPX,
is up 2.4% over the period and the Nasdaq Composite Index COMP,
is up 5.2% so far in December.
Detrick said there is reason to believe there is one more leg to the rally, as Decembers tend to start up relatively slowly and gain steam towards the end of the calendar year.
Source: LPL Financial
Investors are concerned about the market’s ability to sustain the near-unabated rise in records and high valuations amid a resurgence of the COVID-19 pandemic in parts of the world and signs of new strains of the virus emerging even if vaccines are rolled out from Pfizer PFE,
and partner BioNTech BNTX,
22UA,
and Moderna MRNA,
Earlier this month, Yardeni Research’s Ed Yardeni said he expected a strong December performance boosted by investors and fund managers who left some of their pandemic-period winners for value-oriented stocks that have yet to enjoy the fruits of an improving economy.
December gains also follow a powerful rally in November, which MarketWatch’s William Watts said was unlikely to “steal” December’s gains.
Detrick said the effect of the Santa Claus rally could affect trade in the following year.
The analyst said that, going back to the mid-1990s, “there were only six times in December that Santa didn’t show,” and in those cases January also brought a move five times lower, and the full year only had a solid profit. once – in 2016, but a mini bear market at the beginning of that year.
“Given the 2000 and 2008 bear markets, both took place after one of the few cases that Santa didn’t show makes us believers. Should this season-strong period miss the mark, it could be a warning, ”wrote Detrick.
Source: LPL Financial
That said, MarketWatch’s Mark Hulbert argues that a failed Santa rally doesn’t always predict poor performance, although market researcher Yale Hirsch, creator of the Stock Trader’s Almanac, has noted, “If Santa doesn’t call, bears can come. to Broad and Wall ”, referring to the intersection between Wall Street and Broad Street, where the New York Stock Exchange is located.
Analysis of the correlation between the Dow’s performance in the second half of December and its return for the following year and made an interesting finding: the stock market is doing average better after losing in late December and no worse.
Hulbert cautions readers not to extrapolate too much based on his findings, noting that 2021 may stand out from other years and seasonal trends given the global pandemic and its impact on economies.