An old Wall Street maxim states: “If Santa Claus should fail to call, bears may come to Broad and Wall.” As defined by the Stock Trader’s Almanac, the Santa Claus indicator consists of the last five trading days of the current year and the first two days of the new year. The Santa Claus Rally period runs from Monday, December 27 through Tuesday, January 5.
Despite this well-turned phrase, our analysis shows that Santa seems to have limited forecasting ability. In the twelve years with a negative S&P 500 return for the Santa Claus indicator, the market was down only five times in the following year, a hit rate of almost 42%. But according to Ari Wald at Oppenheimer, “Performance in the next 1-2 quarters has tended to be below average when the S&P 500 closes lower” during the Santa Claus Rally (SCR) period. “The S&P 500 has averaged a 1.2% loss in the subsequent three months following a negative SCR versus an average 2.7% gain following a positive SCR.”
While Santa’s crystal ball is sometimes cloudy, he does seem to bring good cheer most years, with the S&P 500 rising an average of 1.3% during those seven trading days since 1969. This 1.3% gain in the S&P 500 is better than the average performance for nine out of twelve months of the year since 1950! In addition, the S&P 500 is higher 77% of the time during the Santa Claus rally period, which is much higher than an average period. Again according to Ari Wald, typically, the S&P 500 generally is up only 57% during a standard 7-day period and rises 0.2% on average. In addition, Strategas Research Partners notes that the second half of December is historically one of the best performing two weeks of the year.
Time will tell if the seasonal market blessings arrive in 2021 or if the news of more Omicron infections, inflation, and Federal Reserve tightening will let the Grinch spoil our investors’ holiday. In any case, the odds favor investors remaining invested during the holiday season. If harvesting tax losses before year-end by selling any stocks with unrealized losses, probabilities favor remaining invested by using ETFs or other stocks as substitutes rather than staying in cash.