Kristal Insights6 Mins Read
The Santa Claus Effect and Your Investments in 2020
Christmas is a period of joy across the globe. With jingling bells to Christmas trees, there is an overwhelming sense of happiness all around. It is also a period of hope and positive expectations from the future with the New Year just around the corner. Interestingly, this period also has a reputation for being great for stock market investors. For decades, stock market analysts have tried to look at the calendar-related effects of stock markets. It is no secret that certain stocks tend to perform better during certain parts of the year. However, there are certain calendar effects like the September Effect, October Effect, January Effect, Santa Claus Effect, etc. which affect the performance of the entire stock market. In this article, we will be exploring the Santa Claus Effect and try to look at what it can mean for the markets this year.
What is the Santa Claus Effect or Santa Claus Rally?
The Santa Claus Effect or the Santa Claus Rally is an increase in the stock market returns during the last five trading days of December and the first two trading days of January. This is probably one of the most visible stock market trends. The term Santa Claus Rally was coined in 1972 by Yale Hirsch – the creator of Stock Trader’s Almanac.
According to Global Financial Data Inc., the average monthly stock returns of the S&P 500 since 1925 are as follows:
In fact, if we specifically look at this seven-day period, the average gains since 1928 have been 1.7% which is considerably higher than the average gain during any seven-day period [Source].
Some probable explanations…
While most calendar-effects are mere observations, there are some explanations for the Santa Claus Rally:
- Investors tend to purchase more stocks to benefit from the January Effect when the stock prices tend to rise.
- Due to the holiday season, the trading volumes are relatively lower. Hence, the market tends to move higher with relative ease.
- In many countries, many investors sell their stocks during the first week of December and then buy the beaten-up stocks in the second half of the month.
- It is a common belief that short-sellers tend to stay away from the markets during these holidays.
Some analysts also believe that the Santa Claus Rally is an outcome of investor psychology. For example, if an investor who is aware of the Santa Claus Effect observes an increase in the index during the said period, they assume that the Santa Claus Rally has begun and buys more leading to a higher index.
It is important to remember that like all other trends and calendar-effects, the Santa Claus Rally is also based on mere observation of the historical performance of the markets. Under no circumstance should it be considered to be a sure way of beating the market returns.
What can you expect in 2019?
In many parts of the globe, experts start looking at the Santa Claus Effect from the beginning of November (the last eight weeks of the year).
2019 has been a year of market resilience. If we look back, this year was riddled with Trump’s trade war with China, the meltdown of WeWork (the shared workspace giant), and the global slowdown of GDP growth. Given these circumstances, the markets should ideally have taken a beating. On the contrary, though, the S&P 500 is up by 23% and the Dow Jones Industrial Average is also up by 18% (Source).
In 2018, the Santa Claus Rally was almost non-existent due to the fear of the upcoming trade war between the USA and China and the Federal Reserve raising interest rates. In fact, this was the worst December performance of the market in decades.
The stock market has had its worst December since the Great Depression. America’s trade war with China, interest rates and uncertainty in government policy all helped to create a loss of more than 10 percent, as of Dec. 27.
While many experts blame bad monetary policy decisions for the crash last year, the forecast for 2019 seems to be better. The trade deal – though not inked in full – seems to be WIP, investor sentiment is positive, and the Santa Claus Rally is expected to be the best in recent years. Here are some reasons behind some analysts having a positive outlook for the year-end rally:
Bullish Market Sentiment
2019 has been a year where most investors have been bullish in their investment approach. The primary contributing factors are the upcoming phase-one trade deal between the USA and China, salaries increasing ahead of inflation, and expectation of a global fiscal stimulus.
Under-exposed Fund Managers
This year, many fund managers had underexposed their portfolios to equity due to the uncertainty of the US-China trade deal and overall reservations about the economy. However, with the year coming to an end, these fund managers will have to buy to ensure that they meet their benchmarks.
Better Market Breadth
Market Breadth is the way to determine the direction in which the stock market is headed across all traded stocks. Currently, the market breadth reveals a strong level of participation. This is evident in the NYSE Advance/Decline Cumulative analysis as shown below:
What does 2020 have in store?
With this being an election year in the US (scheduled for November 2020), there are many investors who are fearing recession as a precursor to the elections. Many experts believe that the overall monetary policies across the globe are easing, the political risks are receding, and the market confidence is surging. Hence, the expectation is for a strong positive loop of global growth and optimism in the stock markets. They also believe that most investors have battled a lot of negative news in the last two years and expect some good news in 2020 making it a great year for stocks.
Then there is the other end of the pool who think that buying is taking place not because of better earnings, an improved economy or better geopolitical relations, but because of the upside momentum the markets have seen. The momo (momentum) crowd, many say, is fickle and can turn on a dime. If the momentum in the stock market reverses – if China connects US support for Hong Kong to the trade deal for instance; those with large gains, especially hedge funds, may want to sell to lock in their profits. This is one of the factors we need to be careful about, as it may revere the sentiments of the momo crowd and accelerate a downward momentum.
How should you position yourself for the Santa Claus Rally?
First things first, while there is a lot of data to support the Santa Claus Effect, past performance of the market is not a benchmark of how it will perform in the future. While some believe that the evidence overwhelmingly supports a phenomenal Santa Claus Rally for end 2019, it is always advisable to invest according to a proven adaptive model like the All Weather Portfolio. Check your portfolio allocation and ensure that you invest in stocks that you believe can benefit if Santa comes to town. Diversify to hedge your losses in case 2018 repeats itself. Look for dividend stocks like Alfac, Illinois Tool Works, Walmart, etc. which offer steady earnings in case the rally never comes.
While calendar-based effects can seem illogical at times, markets have been known to perform erratically when the investor sentiment is skewed in one direction. This year, there is a lot of hope and expectation for the rally to deliver good returns. Position yourself accordingly.
That said, we hope you have yourself a merry Christmas. And if there’s anything we can do to make your holidays sweeter (a customized investment plan for instance), remember you can always wish us at firstname.lastname@example.org !
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