In the early hours of Christmas Day, Santa delivers gifts all around the world.
Sometimes he makes a quick visit to Wall Street too.
It’s called the ‘Santa rally’.
It’s surprising to find there might be something to it.
History does show that December is usually an up month for stocks.
But, as markets were well down this December, many pundits said Santa wasn’t coming this year. That’s what I was hearing anyway, in the weeks leading up to Christmas.
But this is the mistake the analysts all make when they talk about the ‘Santa rally’.
They just lump all the days for December together.
This is not what Yale Hirsch the man who first coined the term ‘Santa rally’ had in mind. The term ‘Santa rally’ first appeared in Hirsch’s 1972 edition of The Stock Trader’s Almanac.
Hirsch has been a scholar of markets for more than six decades. He knows a thing or two. Along with the ‘Santa rally’ Hirsch is also the originator of the four-year stock market cycle, based on US presidential cycles. He was also the first to coin the phrase ‘Sell in May and Go Away’, that we hear so often.
Specifically, the ‘Santa rally’ refers to a very small period between Christmas and the first two days of the new year. Basically, the idea is that this small period is usually a positive one for the stock market.
It seems the fat man in the red suit didn’t forget Wall Street this year. Here’s a chart of the S&P 500:
Analysts put the ‘Santa rally’ down to end of year events, such as fund managers rebalancing their portfolios. Others put it down to bargain hunters buying up tax loss selling. Another theory is that it’s linked to the bonuses that are paid out around this time of year.
Whatever the cause, it’s perhaps something to watch, to get a short-term trade away. The downside to this trade is that it only comes around once a year and if the rally doesn’t come, you have to wait another 12 months to have another crack!
Some analysts take it further. There’s a Wall Street saying that goes, ‘If Santa fails to call, bears may come to Broad and Wall’. What that means is that if the Santa rally fails to come, it is supposedly a bearish signal for the year to follow.
Santa did come to Wall Street, is that a positive signal for 2019?
Hirsch was also the author of the January Barometer. The theory with this one is that the year will reflect January’s performance. In other words, if the market is down in January it’s likely to be down for the rest of the year. So that’s something you can watch for going forward.
‘Santa rally’ aside, there’s a few things that point to Christmas marking a low in markets.
For one thing, all the writers (like me) have become bearish on the outlook for 2019. It sounds counter intuitive I know, but that in my view is a good indicator the market may go higher in 2019. Let’s wait and see.
Secondly, the P/E ratio of the S&P 500 is now near its historical average. If you look back at just the last 30 years, it’s actually undervalued!
And to pick up further on the work of Yale Hirsch once more. His research shows that the third year of the four year presidential cycle is often a strong year for the stock market.
Also, did you catch the US December job numbers last week? The figure came in at 312,000 jobs added for the month. It was a blowout and smashed all the doomy forecasts. The expected number was only for 176,000 jobs. Not only that, a total of 58,000 jobs were added to the prior months of October and November.
But there’s something else to highlight from the December jobs report. Unemployment rose slightly. The reason why? It was mainly due to the high number of job leavers. Their ranks swelled to 142,000 people in December. These are people who quit their jobs and left their positions voluntarily. That doesn’t spell fear in the year ahead. It suggests workers have confidence to quit a job they don’t like with the conviction they’ll find a new better one just around the corner.
A recession is defined as back to back quarters of negative GDP growth. The US economy grew by an annualised rate of 3.4% at last count. I’m not sure how the US can go completely in reverse and record a negative GDP number from here. Not with this sort of jobs growth going on!
It’s a contrarian notion now, but don’t totally rule out the idea that markets may go higher in 2019. Anyway, let’s see what the year brings, but the bears might have to bide their time a little while longer.
Just as an aside, there’s a further reason why markets might turn around Christmas time. It’s based on a permanent cycle that does not change. If you want to know a little bit more about that then go here to learn more.
Editor, Markets & Money