The “Santa Rally” as it’s known is a well-known phenomenon, usually observed in the last week of the year (but by no means limited to it) in which stocks tend to rise regardless of fundamentals. This trend has been observed through well over a century of S&P 500 and Dow Jones Industrial movements, although the cause of the rally remains uncertain (some claim it’s self-affirming, others claim it’s a reversal of tax-loss harvesting, and others say it has psychological roots in new year’s optimism.”
The data is clear: since 1950, the S&P 500 returns about 1.6% in the last couple of weeks of December, and the month itself tends to be positive more often than it is negative. If it is the result of tax-loss harvesting, it can be seen as a week of “easy money” by professional traders picking up cheap stocks as a result of a temporary and artificial decline prior to those days from tax-loss harvesting selling.
Nonetheless, the Santa Rally doesn’t happen all the time, and while 2018 isn’t over quite yet, the data does not look good at all. Stocks have entered a bear market, equities have been in free fall in the U.S. and abroad, and every single asset class has fallen except for one: cash.
Sentiment has hit rock bottom on Wall Street, even if it hasn’t bled over to the “real” economy of Main Street. Consumer sentiment remains strong, retail expenditures are high, and overall incomes are rising. But equity traders have not felt as confident nor as wealthy—and other investors have joined them. Bonds, from Treasuries to junk, are down. Commodities have plunged. Alternative assets are weak. No one is seeing fundamental strength.
The causes of that recent weakness are varied, from the trade war to higher interest rates to perceived overvaluations. But whatever the cause of the weakness, the oft-predicted and ill-understood Santa Rally may prove elusive in 2018.
Of course, the gains from this seasonal aberration are tiny, at less than 2% on average. And that means eyeballs will be glued to markets following the new year to see what 2019 has in store for investors.