Recession or Santa Claus Rally? Q4 Market Outlook 9 26 22

Several times each year investor emotion reaches levels of Excessive Optimism and several times each year emotions reach levels of Extreme Pessimism. A strategy idea I favor is a disciplined risk management equity approach as it relates to the long-term equity portion of a portfolio. Initiate hedges when investor sentiment reaches Excessive Optimism and remove hedges at periods of Extreme Pessimism.

What’s more is that many of the pandemic-driven, supply side issues are starting to show signs of relief. Shipping costs, transportation costs, container costs, ISM service pricing, used car pricing, and other inputs are all falling or coming off highs. As the fourth quarter progresses, these changes should show up in lower inflation data. History shows that the Fed is often done hiking once its policy rate climbs above the 10-year Treasury yield. With the 10-year yield at 3.7% as of Friday, September 23, 2022, we may not have far to go.

santa rally

The other scenario suggests the Santa Claus rally occurs in the week following Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. Traders pay attention to cyclical trends and, at times, find ways to exploit historical patterns. But it’s always a relatively random proposition, and the Santa Claus rally is no exception.

Understanding the Santa Claus Rally That Wasn’t

The backdrop of low dividend yields, low inflation and low interest rates points to a low forward 10-year expected return. Further, the macro fundamental picture remains challenged due to unmanageable levels of debt, unmanageable entitlements and unprecedented market manipulation from the world’s global central banks. 13/34-Week EMA – The cyclical bull market’s uptrend remains in place.

That was the humbug assessment from Citigroup’s global asset allocation team, who predicted Wall Street is unlikely to see a late-year bounce because 2022’s performance hasn’t been good enough thus far. That said, the media may loosely label what it refers to as a Santa Claus Rally that starts as early as Black Friday and continues throughout the month of December. This definition is much less scientific and should not be assumed to occur with the same level of statistical confidence as the original one defined by Yale Hirsch. An employee stock option is a grant to an employee giving the right to buy a certain number of shares in the company’s stock for a set price.

santa rally

News Corp is a global, diversified media and information services company focused on creating and distributing authoritative and engaging content and other products and services. However, market commentators will sometimes use the phrase to describe any rally that takes place around the end of December. For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose. After Hirsch wrote about the pattern, it seemed to become part of the investing lexicon by the early 2000s when a number of references were made to the term in the financial media. Wait to buy a stock until it breaks out of a base pattern on higher than average volume.

The setup was similar in late June as we entered the third quarter. A Santa Claus rally is a rise in stock prices in the month of December, generally seen over the final week of trading prior to the New Year. Trade Signals was created with the intention of providing a disciplined process to hedge the long-term equity portion of a well diversified portfolio.

Read more Over the preceding three weeks, the index of the one hundred largest non-financial companies on the Nasdaq fell 2%, surged 4%, and then slid 3.2%. Investors upset that stocks haven’t taken off enough for a Christmas rally shouldn’t fret, Santa Claus is likely still coming to town. All this is not to say that stocks are nailed on to rally in the final days of this year. Noone’s exactly sure why, but the so-called Santa rally is an established phenomenon.

The other time-span definition—and our preferred one—is the week leading up to Dec. 24. But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself. Review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment or more in a relatively short period of time.


Others insist that the Santa Claus Rally is related to increased holiday spending. In fact, some analysts suggest that strong retail spending is seen as an important economic indicator of economic growth and promotes bullish buying behavior as a result. High year-end sales figures have a tendency to drive retailer stock prices up in anticipation of good quarterly returns. Both of these things are seen as having a domino effect on the rest of the market, leading to broad-based price increases. A Santa Claus Rally is a seasonal stock market trend that often occurs near the end of the fiscal year.

  • If investors anticipate it, they are likely to behave differently, and market participants may adjust according to the expectation of a Santa Claus rally.
  • CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
  • And there are a number of uncertainties on the horizon, with the Federal Reserve set to start hiking interest rates next year and economists unsure about the path of inflation.
  • Prior to buying or selling options, investors must read the Characteristics and Risks of Standardized Options brochure (17.8 MB PDF), also known as the options disclosure document.

Companies that can weather the economic storm well, that are also repurchasing shares at low prices today, can come out winners in the eventual market recovery. While the Santa Claus Rally was originally defined as lasting just seven days, some analysts and commentators tend to use the term more broadly to refer to longer time periods or even the entire month of December. The Santa Claus rally refers to the tendency for the stock market (specifically, the S&P 500) to rally over the week leading up to Christmas (Dec. 25). Apple’s consumer tech was so successful, that by 2007 the company decided to drop “Computer” from its name.

Markets Jingle, but Not All the Way, to a Santa Rally

That said, the real driver of Fed action in the coming months will likely be inflation. A cooling of inflation could put the hope of a soft landing back on the table. That said, with the Fed in the driver’s seat, markets continue to live and die by data releases, especially those related to jobs, inflation and the Fed. Near-term, the road is likely to be rocky with the potential for more downside, but the end of the quarter could make up for that. Some of the common fallacies in analyzing these and other seasonal effects are a lack of clear definitions , the sole use of monthly date , not defining for the reader the details of the analysis and frankly bad data. The problem is that most portfolios do not include a broad enough set of important risk diversifiers and far too many individual investors chase into and out of the stock and bond market.

Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season. The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism. And this year, investors do have considerable additional concerns to mull heading into the new year. Plus, prospects for more near-term fiscal support tokenexus via the Biden administration’s Build Back Better bill have dwindled, and inflation concerns spiked further. Last week, the Bureau of Economic Analysis reported core personal consumption expenditures — the Fed’s preferred inflation gauge — rose at a 4.7% year-over-year clip, or the fastest since 1983. Traders are commended to ignore the talk of a Santa Claus rally and instead stay focused on their own trading strategy and analysis.

santa rally

“It is widely understood that earnings estimates have to fall into recessions, and that current 2023 estimates are too high. However, equity markets are unlikely to be able to look through falling estimates, as valuations typically contract into recessions,” he said. A late-year rally “crucially depends on how well the market has been doing going into year-end. Only when January to October returns were strong has a year-end rally been on the cards,” Citi said. Amanda Reaume has been writing about retirement, investing, and financial planning for over a decade. She is a former credit expert at and wrote a book about financial planning and investing aimed at millennials.

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There is no way to predict if one will occur and sometimes the impact is relatively minor or can even be negative. Also, because it is unclear exactly why the Santa Claus Rally occurs, it is impossible to predict whether those influences will recur in any given year. However, over the last 10 years from 2010 to 2020, the stock market only saw an average Santa Claus Rally of 0.38%. In some years, the stock market has also declined sharply during the days in question. For example, from 2014 to 2015 the S&P 500 experienced a decline of 3.01% and from 2015 to 2016, that index declined by 2.27%.

Inflation – the most important indicator

The historical statistics we looked at above suggest slightly better than odds that a stock rally will take place around Christmastime. However, there are also data points that suggest the rally is more of a shot. According to our analysis cited above, the average positive gain over the last two decades is +1.85%, while the average loss was -3.28%. Several theories try to explain the Santa Claus rally, including investor optimism fueled umarkets review by the holiday spirit, increased holiday shopping, and the investing of holiday bonuses. Another theory is that this is the time of year when institutional investors go on vacation—leaving the market to retail investors, who tend to be more bullish. Older and conservative investors who are not 100% exposed to the stock market could increase exposure to the market during this time of the year to bump up their annual returns.

You will be right from time to time and look like a genius in those moments and, frankly, you will also be wrong from time to time and look less than spectacular. I am far less concerned about getting a short-term directional call correct. For me, it is about inexpensive risk management in a high risk world. For hedging, I favor a collared option approach as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out of the money put options for risk protection.

The average returns for the S&P 500, the Dow, and the Nasdaq Composite over the period have been 1.3%, 1.4%, and 1.8%, respectively. For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000. Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. The first appearance of the term “Santa amana capital review Claus rally” came in 1972 when market analyst Yale Hirsch discovered that market returns were abnormally high in the days after Christmas and leading up the first few days of the New Year. By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next. The term is sometimes used to refer to any rally that takes place around the end of the year.

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