Wall St Week Ahead — Investors look for 'Santa Rally' after grim year in US stocks

Bruised investors are hoping a so-called Santa Claus rally can soften the pain of a tough year in US stocks and potentially brighten the outlook for 2023.

Without a doubt, the market could use some holiday cheer. In December — typically a strong month for equities — the S&P 500 has so far lost around 6 per cent , weighed down by hefty declines in shares of Tesla Inc, Amazon.com Inc and other names that had led markets higher in previous years. The index is down nearly 20 per cent year-to-date and on track for its worst annual performance since 2008.

History shows the market still has a better-than-average chance to pare those losses. US stocks have risen during the last five trading days of December and the first two days of January about 75 per cent of the time, CFRA Research data showed, a pattern attributed to low liquidity, tax-loss harvesting and investing of year-end bonuses.

Friday was this year’s start date for this rally named after Santa Claus — if it happens. It will only be clear around the second trading day of 2023. On

The phenomenon has lifted the S&P 500 an average of 1.3 per cent since 1969, according to the Stock Trader’s Almanac. A December without a Santa rally has been followed by a weaker-than-average year, data from LPL Financial going back to 1950 showed.

The S&P 500 has gained an average of 4.1 per cent in the year after a December without a Santa rally, compared to a 10.9 per cent gain following a period when one takes place. January gains are also muted in a non-Santa year, with the index falling an average of 0.3 per cent compared to a 1.3 per cent gain after a Santa year, the data showed.

“When Santa Claus doesn’t arrive that typically means that there’s something in the market that is causing confusion or an obstacle that it is facing. Negative sentiment doesn’t change because it’s a new year,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

This month’s steep decline underscores how seasonal trends seem to be offset by worries over whether the Federal Reserve’s monetary tightening will plunge the economy into recession.

The S&P 500 has posted only 18 Decembers with losses since 1950, Truist Advisory Services data showed. The index has gained an average of 1.6 per cent in December, the highest of any month and more than double the average 0.7 per cent gain of all months, according to CFRA data.

“If investors start to see the economy slowing more rapidly than people are anticipating and the Fed ends its rate hikes in the first quarter, we could see a tale of two halves” and a strong positive return next year, said Sam Stovall, chief investment strategist at CFRA.