🎅 Must be Santa Claus

Hey hey, happy Monday.

Hope you’re sufficiently stuffed from Turkey Day and ready to crush it in these final weeks of the year.

A few thoughts on Wall Street’s infamous Santa Claus rally below — what it is, what it’s not, and while you’ll hear about it almost as much as you’ll hear Mariah Carey in the month ahead.

Smash the button below to share OptimistiCallie with a friend 😊

You know that Mariah Carey song that plays non-stop this time of year?

The one that starts with a few xylophone notes, then blows you away with a full orchestra of holiday cheer and high notes?

Yeah. You hear it once and you’re immediately in the Christmas spirit. You hear it for the thousandth time and suddenly you feel like hurling the eggnog you just chugged.

Well, Wall Street has a version of that, even though it’s not as melodic as Mariah’s chords.

It’s called the Santa Claus rally, and you’ll start hearing that phrase right about now. By December 24, you’ll be sick of it.

Jokes aside, the Santa Claus rally is a seasonal market pattern that Wall Street has watched for decades. According to the Stock Traders’ Almanac – the book of gospel for technical-minded traders – the Santa Claus rally is an increase in the S&P 500 that tends to happen at the end of the year.

Since 1950, the S&P 500 has risen in the last five trading days of the year through the first two trading days of the following year about 80% of the time. In comparison, the success rate for other seven-day periods during that same timeframe is just 59%.

So, yes, you could argue that Santa and his reindeer like to drop an extra present in your portfolio come Christmas time.

You can see it on this chart of the S&P 500’s average path:

There are a few plausible real-world theories for an end-of-year stock market rally.

Americans are already in a spendy mood, especially if they’re one of the 42% of workers who gets a holiday bonus. It’s not hard to imagine that some of that extra cash finds its way into the stock market. Professional portfolio managers whose livelihood is based on how well their stock picks perform each year tend to buy high-flying stocks in order to eke out some extra return before the books close.

And ‘tis the season for everybody to be in a darn good mood about everything. Sometimes, the best explanation for a Santa Claus rally is just a little extra holiday cheer.

I’m not here to argue the legitimacy of this seasonal pattern. It’s clearly a thing, and who am I to argue with the Stock Traders’ Almanac?

But on a scale of a deep cut holiday song to All I Want for Christmas is You, Wall Street goes full Mariah Carey.

You hear about Santa Claus everywhere.

Stocks are up today? SANTA CLAUS RALLY.

Tesla stock is ripping? SANTA CLAUS RALLY.

The Fed cuts rates? HERE COMES SANTA CLAUS, HERE COMES SANTA CLAUS.

Record highs? MUST BE SANTA.

December becomes a vacuum for level-headed analysis because the market’s moves are almost exclusively pinned on the season.

The Santa Claus rally explainers will be in full force this year, too. For one, the S&P 500 is up an astounding 27% to date, on pace for its best annual gain since 2013. 

Also, those professional portfolio managers I mentioned a minute ago have had miserable years. Just 34% of S&P 500 stocks are doing better than the index, the second-worst year for breadth in this century. In other words, if you pick stocks for a living, it’s been an especially hard time to find companies that could do better than an index fund. Desperation could be a powerful motivator.

Every portfolio manager chasing returns at the same time? SANTA! I KNOW HIM!

Be careful, though. I'm already seeing some takes on how stocks finish strong years extra strong – an overhyped narrative if you actually look at the data. Since 1950, in years when the S&P 500 has been up 20% or more through November, the index also rose in December about 75% of the time. That sounds promising until you hear that in all other years, the probability of a rally in December was 74%.

Performance chasing is rarely as big of a deal as Wall Street makes it out to be. If professional managers really do flock to the best performers in December, you’d expect to see them lead the market higher.

Not so. Only once in the past 22 years has the S&P 500’s best-performing sector from January to November also led gains in December.

I’m not trying to be the Grinch here. I just want you to understand what matters and what doesn’t. You can’t count on a bunch of talking heads with 30-second sound bites, shiny S&P 500 targets and sexy holiday analogies to give you the full truth.

Between now and the end of the year, we have a jobs report, three inflation reports, a retail sales update, and an important Federal Reserve meeting with updated economic and rate projections. Oh, and all the unexpected headline noise we’ll undoubtedly have to endure.

And all of this will unfold against a backdrop of somewhat lofty expectations. At the beginning of October, we all seemed to be resigned to the fact that a recession was just around the corner. 

But in true 2020s fashion, the economy surprised us with a strong September, which was followed by an October full of noise and caveats. Now, I’m worried that nobody really knows where the economy stands, and the re-calibration may be more painful than people expect.

Wall Street can spin up all the holiday analogies it wants. But you and I both know that earnings, the economy, expectations and your emotional control are what matter most for your investing success.

And ultimately, one month probably won’t make or break your portfolio, even if that jolly old fellow from the North Pole decides to skip Wall Street this year.

Enjoy the eggnog. Get in the holiday spirit. Blast that Mariah Carey song. Tune out the noisy world for a few weeks. 

Just don’t let Wall Street convince you that Santa has complete control over an entire month.

He’s not as real as they want you to think.

Happy holidays & thanks for reading!

Callie

Like what you just read? Share it with a friend, pretty please 😊