How Santa Claus’s rise, or lack thereof, sets the stage for the stock market in the first quarter

It’s the time of year when the traditional seasonal rally in US stocks known as the “Santa Claus March” takes place. But unlike past holiday seasons, this one could falter due to recession risks and the steady rise in interest rates through the new year.

Santa Claus rising refers to the tendency of the stock market to rise in the last five trading sessions of a calendar year and the first two sessions of the next year. Friday marked the beginning of the period, which will last until January 4 this time. Analysts said investors shouldn’t count on stock market gains this holiday season, though some market participants remain hopeful.

History underscores how bullish this last stretch of the year tends to be, and how uncommon it is to see stock market dips before and after Christmas. 72 years of data on the S&P 500 SPX and its predecessor index, the S&P 90, shows that only 15 to 16 holiday seasons have failed to make a rally. Of those seasons, seven followed first-quarter losses in the index, according to market data from Dow Jones.

Read: End of the year rally? A bullish stock market pattern is set to collide with stagflation fears

Any Santa Claus rally to close out the 2022-2023 season will be short-lived in nature, and we’ll give those gains back quickly because there won’t be any sustained rally as the Fed keeps interest rates high, said Eric Sterner, chief investment officer at Apollon Wealth Management, which manages $3.1 billion. Dollars from Mount Pleasant, SC

“It will likely be the whole of 2023 before inflation comes down, and on top of that, we have big earnings revisions that need to happen,” Sterner said on the phone. He said earnings per share could fall 15% to 20% on average, against current estimated gains of 4% to 5% for next year, and that the S&P 500 could retest its October low of around 3,500 in the first half of the year. 2023 before that. Ending the year flat.

Stocks struggled in 2022, with the S&P 500, Nasdaq and Russell 2000 indexes in double digits The declines, as the Federal Reserve continued to raise interest rates to stem inflation, which reached its highest levels in four decades. The Dow Jones Industrial Average fared better, but was still down 8.6% year-to-date through Friday.

Read: Wall Street’s stock market outlook for 2022 was far from the biggest margin since 2008: Will next year be different?

When stock market gains failed to materialize during Santa’s stretch, the S&P 500 averaged just 0.53% gain in the ensuing first quarter, according to Dow Jones market data. This is in contrast to most times there have been gains in the holiday season, where the index produced an average of 2.49% in the first quarter thereafter.

This year is “definitely a good candidate for a Santa Claus rally, given how badly this year sold, but that doesn’t mean you’re going to have a good year, on average,” said Eric Deaton, Boca Raton, president and general manager at The Wealth Alliance based in Florida, He oversees $1.5 billion in assets under management and brokerage. “The biggest correlation is the January index, where if January is positive, you have a higher probability of having a positive year.”

“If corporate earnings can hold up after this massive tightening by the Federal Reserve and a massive reduction in the money supply, then the stock market should have a good year,” he said over the phone. “If earnings fall, another leg will fall. My hunch says we could see a mild recession, but I’m very optimistic about the second half of 2023: The Fed should raise interest rates by then, decompressing the market.”

Dow Jones Industrial Average DJIA,
The S&P 500 has each traded up nearly 80% during the seven-day holiday period since 1950, gaining an average of 1.38% and 1.32%, respectively, according to market data from Dow Jones. nasdaq composite,
It has traded higher 78% of the time since 1971, with an average profit of 1.81%, while the Russell 2000 RUT,
It has risen 71% of the time since 1987 and has gained 1.5% on average.

Source: Dow Jones market data

If the Dow and S&P 500 finish higher for the 2022-2023 season, it will be Santa Claus’s seventh consecutive successful rally and their longest winning streak since the eight-series that occurred between 1969-1970 and 1976-77.

Source: Dow Jones market data

Data from FactSet shows that analysts remain relatively bullish about the direction of US stocks in 2023: As of Wednesday, their average estimate for the S&P 500 6-12 months from now was 4,517.29 — up from Friday’s close of 3,845. For the Nasdaq Composite, their average estimate was 13,577.30 versus closing at 10,497.86 on Friday.

Read: Wall Street’s stock market outlook for 2022 was far from the biggest margin since 2008: Will next year be different?

Major market-impacting news is scarce between now and the end of the year, said Keith Buchanan, senior portfolio manager at GLOBALT Investments in Atlanta, which oversees $2.5 billion. “With recession risks looming, sentiment has been overwhelmingly overpowered and there is pessimism in the markets. When that is the case, a rebound of some sort can usually be set up.”

Buchanan said on the phone that GLOBALT remains fairly conservative in its positions, while waiting for opportunities to focus on a more aggressive stance. Meanwhile, market participants await what it calls a “blue sky” scenario, in which inflation declines further in 2023 and the Federal Reserve engineers a soft landing by slowing the economy without throwing millions of people out of work.

“The lack of a Santa’s recovery will set the tone in early 2023 for a market that needs some or no optimism for a recovery in the face of what many economists are predicting: a recession,” he said. Alternatively, the Santa Claus march coming true “doesn’t necessarily mean that 2023 will be a boomerang year, but it might help the rest of January.”

See also: Is the stock market rebound of 2023 in store after the 2022 sell-off? What history says about the successive years of loss.

The economic calendar is light in the week that is shortened by a holiday. The stock market is closed on Monday for Christmas, which falls on Sunday, and closed again on January 2nd in observance of the New Year holiday.

On Tuesday, November data on commodity trade is due, along with the S&P Case-Shiller US House Price Index for October and the FHFA US Home Price Index.

Wednesday brings the pending home sales index for November. On Thursday, the Initial Weekly Unemployment Claims were released, followed the next day by the Chicago PMI for December.

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