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How a Santa Claus rally, or lack thereof, set the stage for the stock market in the first quarter


It’s that time of year that typically takes place in the traditional seasonal rally for US stocks known as the “Santa Claus rally.” But unlike previous holiday seasons, this season could be bogged down by the risks of a recession and continued interest rate hikes into the new year.

Santa Claus’s increase indicates the uptrend of the stock market in the last 5 trading sessions of the calendar year and the first 2 sessions of the following year. Friday marks the beginning of this period, which will run until January 4 around this time. Analysts said Investors shouldn’t expect stock market gains this holiday season, though some market participants are still holding out hope.

History highlights how bullish the last part of the year is, and it’s relatively rare for the stock market to drop before and after Christmas. 72 years of data on the S&P 500 SPX and its predecessor, the S&P 90, shows that only 15 to 16 holidays fail to trigger a rally. Of those seasons, the next seven are the indicator of first-quarter losses, according to Dow Jones Market Data.

Read: Year-end protests? Bullish stock market pattern set to collide with inflation fears

Any Santa Claus rally to end the 2022-2023 season “will be very short-lived in nature and we will quickly return those gains as there won’t be any sustained rallies.” with the Federal Reserve keeping interest rates high,” said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $3.1 billion from Mount Pleasant, SC

“It will probably take all of 2023 before inflation comes down and on top of that we need to make big earnings adjustments,” Sterner said by phone. He said earnings per share could fall 15% to 20% on average, compared with current estimates of 4% to 5% gain for next year, and the S&P 500 could retest its all-time lows. October was about 3,500 in the first half of 2023 before that. end the year flat.

Stocks took a hit in 2022, with the S&P 500, Nasdaq and Russell 2000 all posting double-digit percentages. decline, as the Federal Reserve continues to raise interest rates to stave off inflation that is at a four-decade high. The Dow industrials fared better, but are still down 8.6% year-to-date through Friday.

Read: Wall Street’s stock market forecasts for 2022 have diverged by the largest margin since 2008: Will next year be different?

When stock market gains failed to materialize during the Santa Claus period, the S&P 500 averaged only 0.53 percent gains in the first quarter that followed, according to Dow Jones Market Data. That contrasts most of the time when there are gains during the holiday season, with the index generating an average gain of 2.49% in the first quarter thereafter.

Eric Diton, Boca Raton, said this year is “definitely a good candidate for the Santa Claus rally, given how bad the sell-off is this year, but that doesn’t mean you will have a good year ahead,” said Eric Diton, Boca Raton. president and chief executive officer at Fla.-based The Wealth Alliance, which oversees $1.5 billion in assets under management and brokerage. “The bigger correlation is the January index, where if you have a positive January, you have a higher probability of having a positive year.”

“If corporate earnings can hold up after this massive Fed tightening and the money supply drops significantly, then the stock market is going to have a pretty good year,” he said by phone. “If income doubles, we get another step down. My intuition tells us we could experience a mild recession, but I’m pretty optimistic about the second half of 2023: The Fed should finish raising rates by then, taking the pressure off the market. .”

Dow Jones Industrial Average
DIA,
+0.53%

and the S&P 500 Index each traded nearly 80% higher during the seven-day holiday period since 1950, averaging 1.38% and 1.32%, respectively, according to Data. Dow Jones market data. Nasdaq Composite
CALCULATOR,
+0.21%

has traded 78% higher since 1971, with an average gain of 1.81%, while the Russell 2000
WITHDRAW,
+0.39%

has increased by 71% since 1987 and increased by 1.5% on average.

Source: Dow Jones Market Data

If the Dow and S&P 500 industry ends the 2022-2023 season higher, it will be their seventh consecutive successful Santa rally and their longest winning streak since eight. took place between 1969-1970 and 1976-1977.

Source: Dow Jones Market Data

Data from FactSet shows analysts remain relatively bullish on the direction of US stocks in 2023: As of Wednesday, their average estimate of the position of the S&P 500 in the six to 12 months from it’s now 4,517.29 — up from Friday’s close of just 3,845. For the Nasdaq Composite, their median estimate is 13,577.30 compared to a close of 10,497.86 on Friday.

Read: Wall Street’s stock market forecasts for 2022 have diverged by the largest margin since 2008: Will next year be different?

With the scarcity of important news affecting the market between now and the end of the year, “conditions are definitely ripe for a rally,” said Keith Buchanan, senior portfolio manager at Singapore. right now and may coincide with what we normally experience this time of year.” GLOBALT Investments in Atlanta, oversees $2.5 billion. “With the risk of a recession looming, sentiment has been beaten down quite a bit and there is pessimism in the market. In that case, it’s often possible to set up some kind of bounce.”

GLOBALT remains somewhat conservative in its stance, pending an opportunity to shift to a more positive stance, Buchanan said by phone. Meanwhile, market participants are waiting for what he calls a “blue sky” scenario, in which inflation will fall further in 2023 and the Fed designs a gentle landing by slowing the economy without causing millions of people to lose their jobs.

“The lack of a Santa Claus rally will provide an early signal in 2023 that the market needs some or any optimism to recover in the face of what many economists expect,” he said. impending prediction: recession”. Additionally, a Santa rally coming to fruition “doesn’t necessarily mean 2023 will be a year of recovery, but could help for the rest of January.”

Also see: Will the stock market in 2023 recover from the 2022 sell-off? What history says about consecutive lost years.

Gentle economic calendar for the upcoming shortening week. Stock market is closed on Monday for compliance Christmas dayfalls on a Sunday and closes again on January 2nd to comply with the New Year holiday.

On Tuesday, November commodity trade data will be released, along with the US S&P Case-Shiller home price index and the US FHFA home price index for October.

Wednesday brings the pending home sales index for November. On Thursday, initial weekly jobless claims are released, the next day Chicago’s purchasing managers index for December.

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