27 Dec

Santa Rally: Why the S&P 500 tends to climb this time of year?

December 27, 2023

By ForexTime 

  • SPX500_m pushing higher today to kick off “Santa Rally” period
  • “Santa Rally” period typically refers to last trading week of December and first 2 trading days of new year
  • S&P 500 has climbed in 4 out of the past 5 “Santa Rally” periods
  • US stocks soared this year due to AI-mania and hopes for Fed rate cuts in 2024
  • SPX500_m should have enough reasons to reach new record high next year

 

The SPX500_m is edging higher on this first trading day after Christmas.

NOTE: The SPX500_m tracks the underlying S&P 500 index, which is the benchmark used to measure the overall performance of US stock markets.

Gains today (Tuesday, December 26th) and in the days ahead, would prove true the seasonal occurrence of a “Santa Rally”.

 

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What is a “Santa Rally”?

The classic Santa Rally sees US stock markets rising around Christmastime, and going into the new year.

According to research going back to 1950, this “Santa Rally” period specifically refers to the last week of December and the first two trading days of the new year.

This year-end period has produced a positive return for the S&P 500 nearly 79% of the time.

Furthermore, December has historically been a favourable month for US stocks.

According to Dow Jones, the S&P 500 has ended higher in December more often than any other month.

No other similar duration of trading sessions is more likely to be higher.

The statistics also indicate that this seven-day span has averaged a 1.3% gain which is the third-best seven-day run of the year.

 

Still, market commentators tend to use the ‘Santa Rally’ term quite broadly to refer to either the entire month of December or a relatively longer time period.

After all, the SPX500_m has been soaring since early November, and really for much of this year (more on that in a bit).

 

“Santa Rally” happened in 4 out of the past five year-end seasons

Hence, if we take further liberties with the supposed timeframe, extending it from the first post-Christmas trading day until the first weekend of the new year, here’s how the S&P 500 has fared during this festive period:

  • 2022 – 2023 = +1.3%
  • 2021 – 2022 = -1%
  • 2020 – 2021 = +3.3%
  • 2019 – 2020 = +1.4%
  • 2018 – 2019 = +4.8%

Of course in some years, stock markets have performed poorly, as was the case at the tail-end of 2021 as stocks continued to struggle with the prospects of incoming Fed rate hikes.

So, seasonality and calendar theories are not a guaranteed way to make profits as it is tough to predict what will impact markets in any given year.

 

5 potential causes for a “Santa Rally”

There are numerous reasons why the last few days of December and the first couple in the new year are good ones for stock markets.

  1. The January effect is often cited as institutional investors ready themselves ahead of and into the new year, to set up positions for the coming weeks and months.
  2. We also see a rebalancing of portfolios by major institutions for tax-loss selling in December to close out losses, followed by repurchasing in January.
  3. Certainly, the holiday period is a time of lower volumes when liquidity is thin. This can make it easier for bullish investors to move markets during the season of goodwill.
  4. Increased holiday shopping and optimism over the Christmas season may also include investing holiday bonuses.
  5. The impact may simply be a self-fulfilling one as investors know about the trend for a Santa rally so will buy stocks accordingly, leading to further gains.

 

Santa Rally would cap off a “magnificent” year for US stocks

Of course, 2023 has seen the “Magnificent Seven” take all the plaudits as they have propelled the major indices to (near)record highs.

Here’s a recap of the year so far for these 7 Big Tech stocks:

  • Apple and Nvidia secured new all-time peaks this calendar year.
  • Tesla and Meta more than doubled (climbed over 100% each) over the course of 2023.
  • Amazon, Alphabet (Google’s parent company), and Microsoft have each recorded year-to-date gains of 82.6%, 60.8%, and 56.2% respectively.

All that far surpasses the S&P 500’s year-to-date ascent of 23.8%.

 

That said, encouragingly the market breadth has broadened in recent months.

In general, the greater the number of stocks that are helping push the overall market higher, the more support the market has.

 

2023 Recap: What drove US stocks higher this year?

Simply put, US stocks have climbed higher this year due to the AI-mania as well as hopes for Fed rate cuts in 2024.

This once again shows that markets are forward-looking in nature: today’s prices reflects tomorrow’s expectations.

For the first half of the year, much of the gains for US stocks had been due to the optimism surrounding artificial intelligence (AI).

Hence, the stunning double- and triple-digit returns seen for the “Magnificent 7” (Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, and Meta).

 

Then, US stocks pulled back between August through October, as doubts started to creep in about whether the AI-mania had gone too far.

Also, this Aug-Oct period was when markets heeded the Federal Reserve’s (Fed) messaging that interest rates could stay higher for longer as US inflation appeared stubbornly elevated.

 

However, after the Fed’s final two policy meetings of 2023 (early-November and mid-December), markets ramped up hopes that US interest rates will move lower in the new year.

Such hopes were solidified when FOMC members (Fed officials who vote on interest rates) themselves projected 75-basis points in rate cuts for 2024.

NOTE: US stocks, especially growth/tech stocks, tend to rejoice at the prospects of US interest rates moving lower.
This is because lower interest rates make it cheaper for such companies to borrow money and expand their respective businesses.

 

Can the SPX500_m keep climbing next year?

US stock markets are expected to enjoy another year of gains ahead, based on 2 key reasons:

1) The aforementioned Fed rate cuts

2) US Presidential Elections seasonality

Since 1980, the S&P 500 has posted an annual gain in every single year featuring a US Presidential Election, except during the 2000 dot com bubble and the 2008 Global Financial Crisis.

 

The two factors listed above have even prompted Wall Street to forecast a further 7.6% in gains for the S&P 500 over the next 12 months.

If those forecasts prove true, by this time next year …

We could see the S&P 500 index above the 5,100 mark for the first time in its history!

 

As things stand, the SPX500_m’s highest-ever intraday price now stands at 4820.0, posted on January 4th, 2022.

That said, barring a “black swan” event that blindsides investors and traders in the coming year …

The SPX500_m should have enough reasons to set a new record high in 2024!

Forex-Time-LogoArticle by ForexTime

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