The phenomenon of the Santa Claus Rally has been observed by Wall Street investors, who have referred to it as the perceived increases in share prices from the week before Christmas falling on 25 December to the week after the holiday on 2 January. It appears to be due to two factors.
An increase in companies' revenues due to increased spending before the festive period, and the end of the accounting year and the closing of transactions for tax optimisation purposes by funds. Will we encounter this phenomenon this year as well and on which stocks could we see it?
“This year, Santa may not deliver”
As Bank of America's analysis showed: “While there’s no guarantee that the market will end up posting a gain during the full rally period, the S&P 500 has been positive nearly 79% of the time during those days since 1928, with an average gain of 1.7%”. Since 2000, the largest gain during this period on the S&P 500 index has been 7.4% and the worst was -3%. Positive results occurred more than 75% of the time.
Based on the last 10 years of data, if we wanted to estimate the price with an average increase in the S&P 500 index, for this event we could expect a value around 4142 points. For a maximum decline around (-3%) 3948 points and for an increase (7.4%) around 4371 points.
The current tightening of monetary policy by the FED (Federal Reserve System), by means of raising interest rates and thereby increasing the cost of borrowing for companies, may give negative signals towards the market. According to Citigroup's asset allocation team: “This year, Santa may not deliver. Given that a Fed pivot is for now out of the question, the focus for remaining bulls is slowly shifting to whether the midterms and improved seasonals in Nov/Dec can improve the equity outlook. We doubt it, 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”
Father Christmas rally in other markets
For the German DAX index (DE40), according to Quantified strategies, it has risen 71% in this period since 2000, with an average increase of 1.81%. Taking the index level of 14500 points as a base, the result would be around 14762 points. However, it should be noted the seemingly extremely heavy situation on European markets related to the immediate consequences of the war in Ukraine. On a more positive note, looser monetary policy vis-à-vis that in the United States may be a threat, but the high 3-month correlation (dependence) coefficient between the DAX, S&P 500 index, which amounts to 0.86, may prove to be a threat. This illustrates the high dependence of these markets.
What can we expect?
Looking at the data presented earlier and the macroeconomic situation, it would appear that the current year is significantly less possible than the years of economic growth. Therefore, the performance of the S&P 500 and DAX indices, it seems possible to produce few or significantly worse results than a statistical year.
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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