As the year draws to a close, investors begin to anticipate the famed ‘Santa Claus rally’.
The often observed ‘Santa Claus rally’ is often marked by a strong stock market performance across the Christmas and New Year period.
However, the difficulty in predicting the likelihood of the alleged trend, leads many to question; is it as fictionalised as the famed festive character from which it derives its name?
The lack of 2014 rally suggests perhaps the trend has been overstated. So, what can we expect as 2016 draws to a close?
What is it?
“People use the phrase sort of loosely for any sort of year end rally,” Mr Jeff Hirsch, editor in chief of the Stock Trader’s Almanac explained in comments made to Yahoo.
“The Santa Claus rally, as defined by the Stock Trader’s Almanac and Yale Hirsch who created it (in 1972), is the last five trading days of the year plus the first two of the New Year,” Hirsch says,
Despite Mr Hirsch’s assertions, there remains ongoing dispute among the market over what period constitutes the so-called Santa’s rally.
Is it likely?
PNC Financial Services’ chief investment strategist William Stone mentioned the trend in a note circulated to investors:
“According to the 2016 Stock Trader’s Almanac, since 1969 the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons — the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average. Nevertheless, each year there is at least one day of declines.
Alternative research over a longer period confirms the persistence of these trends: According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7% during this seven day trading period, rising 77% of the time.”
Whilst the Christmas period rally has been noted as a common tendency of the market, there have nonetheless been years when the so-called rally failed to materialise. For instance in the years of 1990, 1999, 2004, 2007, and 2014. Will 2016 also prove an exception?
The markets will similarly be watching intently upon potential movements by the Fed with regards to interest rates. Comments made by The Federal Reserve chairwoman, Janet Yellen, following the surprise election of Donald Trump, signaled a potential interest rate hike in December, which may cause ‘unseasonal’ volatility.
She said:
“The evidence we have seen since we met in November is consistent with our expectation of strengthening growth and improving labor markets and inflation moving up,” she said in testimony on Capitol Hill on Thursday. “I do think the economy is making very good progress toward our goals.”
The Fed has not raised its benchmark rate since last December, when it rose from 0.25% to the current level of 0.5% – the first interest rate rise in seven years.
Potential consequences
In the aforementioned note to investors, Mr Stone also noted the effects in the event of no Christmas period rally. He stated:
“when the rally is not realized, the New Year is dominated by the bears. For example, the January following the 4% decline in 1999 began a 33-month decline in the S&P 500. Also, the decline in the S&P 500 at the end of 2007 kicked off the second-worst bear market in modern history,”.
The January Effect
This rally is typically an American phenomena and a result of an increase in buying when investors initiate price depression created by crystallisation of losses in order to counteract capital gains.
Ultimately, it remains to be seen whether 2017 will prove to be as turbulent for the markets as 2016 has thus far been. In the currency markets, the pound saw a marked devaluation towards the latter end of 2016, following the UK decision to leave the European Union. In addition, Mr Trump’s election provoked a strong rally in markets.
Equally, 2017 is set to be a somewhat politically decisive year with a host of European elections such as France and Germany’s on the horizon – which no doubt will affect market movements.