With the stock market looking like it's stuck in a range, the bulls may be wondering if the traditional 'Santa Claus Rally' will make an appearance this year. Sometimes also referred to as the ‘year-end’ rally, Wall Street lore suggests that stocks traditionally stage at least some sort of a rally as New Year’s Eve approaches.
A friend and colleague of mine, Mr. Curtis Bergquist, who presides over Ameribanc Advisors, did some research on the subject and was kind enough to pass it along to me. In digging through the results of all the Decembers since 1928, Curt found that the average gain for the month of December isn’t too bad at all.
Cutting to the chase, the final month of the year shows a gain of +1.4% on average while the median (half above and half below) is even better at +1.52%. Given that the average annual return for the S&P 500 is something on the order of +9.7% for the entire year, it is obvious that December is one of the months you may not want to miss. In fact, the month of December sports a gain more than 64% of the time.
However, since Curt is an analyst at heart, he didn’t want to just leave it there. No, he wanted to know whether or not there were factors that influenced Santa’s arrival and then if those factors had any impact on the the bounty received from Santa’s sleigh.
In going back to 1928, Mr. Bergquist discovered that, on average, the last 7 trading days of the year produced a gain of +1.24%. And given that the average gain for the month is only +1.4%, it is clear that investors won’t want to miss the Santa Rally with any degree of regularity.
The only problem with using averages is they are just that – averages. For example, while last year’s Santa Rally produced a return of +1.73%, the last 7 days of December in 2005 and 2006 produced losses of -0.9% and -0.5% respectively. So, playing for the last week and a half of the year is not a gimmie.
Curt then looked at what happens during the last 7 days when the market was in the midst of a secular Bull market such as the 1982 – 2000 period or the years from 1942 through 1965. During such bullish times, one might expect to see the market finish the year on a strong note. Yet, surprisingly, while the month of December was stronger than average (+2.54% vs. +1.40%), the traditional Santa Claus rally during a secular bull market was relatively weak, with gains averaging just +1.04%.
What about the times when the market was in a secular Bear Market, you ask? (For the record, the secular bear market periods include 1929 – 1941, 1966 – 1981, and from 2000 forward.) Well, it turns out that during big, bad bear periods, Decembers are significantly weaker on average, sporting gains of just +0.1%. However, the Santa Claus rally tends to arrive right on schedule with average gains of +1.47%.
Curt also found that the last 7 trading days of the year tend to be much better than average when the first 15 days of December show a loss. It seems that when the first part of December belongs to Ebenezer Scrooge, Santa shows up with a better-than-average gain of +1.9%.
And while the bears still have some time to spread some humbug, this year, the S&P is sitting on a gain of nearly 1% already. So, based on this analysis, we probably shouldn’t expect Santa to be too terribly generous this year.
Being a bit of an analyst myself, I was curious as to the results of the Santa Rally in years when the market had just come off of a steep decline – like this one. While the sample size is small and based solely on the memory of yours truly, the gains during the last 7 trading days in years following a big decline turned out to be just about average at +1.4%.
So, will this year produce a Santa Claus or Year-End rally? History would seem to suggest that the odds are in the bulls’ favor. However, if the dollar continues to rally, we just might wind up with a lump of coal.
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