Will There Be A Santa Rally This Year?

By Orbex

The news around the omicron variant has been pushing the markets around quite a bit over the last few days. What’s worse for traders, is that a lot of the news is not predictable, even if you go through as much of the available data as possible.

One day European countries announce new lockdowns to stop the spread, tanking the markets. Then the next day, study results show that certain treatments are still just as effective against the new variant, and stocks soar.

It would be nice to have some certainty

It’s normal for markets to be a little more choppy towards the end of the year. Many of the big traders have already stepped away from their desks to take a vacation.

By Friday, liquidity in the markets will be significantly reduced, meaning that small events can have an outsized impact. Usually, between Christmas and New Year’s there are typically less experienced traders in the markets, so reactions tend to be less logical.

So, there is a lot of interest in having something a little more certain to trade on. One of the big believers in the Santa Claus Rally, at least this year, is CNBC’s, Jim Cramer. In fact, he’s been talking about it quite extensively, to the point that it caught other analysts’ attention. But, is he right?

You can’t know the future, only the past

Obviously, we can’t know if there will be some major news that will push the markets over the next couple of weeks.

Nonetheless, statistically speaking, stock markets do tend to go up at the end of the year. To better understand if that’s likely this year, we need to examine why the Santa Claus Rally happens.

Basically, there is a combination of increased optimism from the general good feeling around the holidays, and institutional investors pre-positioning themselves for the year-end balance. The latter part means that a lot of institutions try to “window dress” their portfolios to have the better-performing stocks in them.

So, stocks that have been doing well all year are likely to get a little boost at the end. And stocks that have been underperforming are likely to get a little bit of extra weight attached to them.

Taxes are inevitable

The other aspect of the rally is that institutional investors need to face the taxman.

Profit generated throughout the year that hasn’t been reinvested yet is likely to be taxed. That rate is often quite a bit higher than whatever overvalue the average market might have. This means that many institutions can simply go into the market to buy anything, just to make sure they have assets.

The question is, of course, whether they will prefer more safe-haven instruments given the uncertainty, or whether they will prefer more risky assets. If the general attitude is of a wait-and-see what happens with omicron, institutional investors might get in the way of a Santa Claus Rally in the stock market. However, that might help currencies and gold in particular.

Either way, it might be a good time to recheck any open positions you have over the coming days, to account for the increased volatility. That said, most traders take on a more conservative position throughout these two weeks, with good reason.

Article by Orbex

Orbex is a fully licensed broker that was established in 2011. Founded with a mission to serve its traders responsibly and provides traders with access to the world’s largest and most liquid financial markets. www.orbex.com