January 5, 2023
In my December 22 email message, I described the time-tested stock market indicator known as the Santa Claus Rally. Wednesday’s stock market close marked the end of the Santa Claus Rally, technically classified as the last five trading days of the year plus the first two trading days of the new year. If the market is positive over the Santa Claus Rally period, we should expect solid stock market returns for the upcoming calendar year. If the market is negative over the Santa Claus Rally period, it is a warning sign of sub-par returns.
If the market is positive over the Santa Claus Rally period, we should expect solid stock market returns for the upcoming calendar year.
Please don’t shoot the messenger, but this time (2023/2024) the S&P 500 fell -1.1%. This is the 16th occasion since 1950 that the S&P 500 closed lower during this period, snapping a seven-year streak of positive returns during the Santa Claus Rally.
Now that the streak is over, investors have yet another reason to be “risk-minded”. The S&P 500 has historically generated an average annual return of just 4.1% and a median annual return of only 3% when the Santa Claus Rally period is negative. Since 1950, the S&P 500’s average annual return is 9.3%. So, we could say the failure of the Santa Claus Rally indicator points to a 2024 stock market return of less than 50% of an average year.
The Santa Claus Rally indicator has a strong, but not perfect track record. There are numerous data sets to consider in market forecasting. Some strategists on Wall Street are dismissing the Santa indicator, as they are predicting that the stock market’s momentum in late 2023 means we could enjoy another solid year for stock returns in 2024. Historically, when the S&P 500 returns 20% or more during a calendar year, the index gains an average of 9.6% the following year.
The S&P 500 has historically generated an average annual return of just 4.1% and a median return of only 3% when the Santa Claus Rally period is negative.
While negative Santa Claus rally periods have traditionally signaled lackluster market performance the following year, our colleagues at LPL believe there are plenty of positive catalysts such as: falling inflation and interest rates, the conclusion of the Federal Reserve's rate-hiking campaign and improved corporate profitability, which could spur good stock market returns in 2024.
Here at Riverfront Capital, we remain a bit more cautious. As you know, we don’t rely on any one indicator on which to base our investment outlook. As we sit here in early January, our composite view continues to point us toward a conservative posture with respect to the stock market outlook, and the negative signal from the Santa Claus Rally indicator adds support to our point of view. Please feel free to reach out to me with questions or comments.
Bruce Robinson, CFP®
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