Investors wait, like children on Christmas Eve, for Santa Claus to come down the chimney, march down Wall Street, and deliver the rewarding gift of a stock market rally.
This year, investors may be better off betting on a lump of coal rather than waiting for notable stock market gains this holiday season, market analysts said.
“The Santa Claus rally has been canceled this year as the stock market has seen higher yields and contracted earnings,” said José Torres, chief economist at Interactive Brokers. “The seasonal tailwinds that traditionally lead to Santa Claus rallies pale in comparison to the plethora of headwinds the stock market is currently facing.”
US stock indexes fell this week with the S&P 500 SPX.
and the Dow Jones Industrial Average DJIA,
Both posted their sharpest weekly declines in nearly three months, according to Dow Jones Market Data. The decline came as stronger-than-expected economic data added to concerns that the Federal Reserve may need to be more aggressive than previously expected in its fight against inflation, even with alarms about a potential economic downturn.
To see: What history says about stock market performance in December
Santa Claus tends to come to Wall Street almost every year, bringing a short rally on the last five trading days of December and the first two days of January. Since 1969, the Santa Rally has boosted the S&P 500 by an average of 1.3%, according to data from the Stock Trader’s Almanac.
“December is the strongest month of the year seasonally, especially in a midterm election year. So December was mostly positive,” said David Keller, chief market strategist at StockCharts.com. “It would be highly unusual for stocks to sell off sharply in December.”
Will Wall Street Get a Santa Claus Rally?
A rotten year for financial assets is coming to an end under a cloud of uncertainty. Given the Federal Reserve’s tough stance on keeping inflation under its 2% target and already volatile financial markets, many analysts think investors shouldn’t pay too much attention to whether Santa Claus will be naughty or nice.
“Next week will be a big week for the markets as they try to find some footing heading into the end of the year,” Cliff Hodge, chief investment officer at Cornerstone Wealth, said in an emailed statement Friday.
That makes the Fed’s interest rate decisions next week and new inflation data all the more important for equity markets. On Friday, wholesale prices rose more than expected in November, dampening hopes that inflation is cooling. The core producer price index, which excludes changes in food, energy and trade prices, also rose 0.3% in November from a 0.2% increase in the previous month, the Labor Department said.
The corresponding November consumer price index report, due at 8:30 a.m. on Tuesday, will further indicate whether inflation has eased. CPI increased by 0.4% in October and 7.7% a year ago. The main indicator increased by 0.3% during the month, and by 6.3% on an annual basis.
“If the CPI prints 5% on the core, then you’re going to have a real selloff in bonds and stocks. If inflation is still running high and you have a recession, can the Fed cut interest rates? Maybe not. Then you start getting into stagflation scenarios,” said Ron Temple, head of U.S. equities at Lazard Asset Management.
To seeCredit Suisse warns: Investors won’t see relief from Fed rate cuts until 2024
According to CME FedWatch, traders are pricing in a 77% chance that the Fed will raise its policy rate by 50 basis points to a range of 4.25% to 4.50% on the final day of its December 13-14 meeting. instrument. That would be a slower pace than the four consecutive 0.75 basis point rate hikes since June.
To see: 5 things to watch for when the Fed makes an interest rate decision
John Porter, chief investment officer and head of equities at Newton Investment Management, doesn’t expect any surprises about how much the Fed will raise interest rates next week. However, he expects stock market investors to closely monitor Fed Chair Powell’s press conference and “hang on every word” for thoughts on the decision.
“Investors are twisting themselves almost like pretzels and trying to overinterpret the language,” Porter told MarketWatch by phone. “Listen to what they say, don’t listen to what they say. They are [Fed officials] “They will continue to be vigilant and they should monitor inflation.”
Does the “Santa Claus” rally really exist?
For years, market analysts have explored potential causes of the typical seasonal Santa Claus pattern. But with this year still in the red, some think the rally in late December could become a self-fulfilling prophecy, as investors look for any reason to be a little more cheerful.
“If everyone focuses on positive seasons, it can become this narrative that drives everything rather than something more fundamental,” David Lefkowitz, head of Americas equities at UBS Global Wealth Management, told MarketWatch by phone.
“Markets love the fun spending season, so there’s a name for the year-end rally,” said Liz Young, head of investment strategy at SoFi. “For what it’s worth, I think the ‘Santa Claus Rally’ has as much predictive power as ‘Sell and Walk Away in May,’ which is minimal and coincidental at best.”
The great trials of a relief rally
Although the three major US stock indexes suffered sharp weekly losses, stocks rose above October lows. The S&P 500 has risen 9.9% since its October lows through Friday, the Dow Jones Industrial Average DJIA,
16.5% and the Nasdaq Composite COMP,
It advanced 6.6%, according to Dow Jones Market Data.
However, many top Wall Street analysts also see reasons for alarm, especially as the stock market bounces off recent lows as it likely runs out of room.
So are investors ignoring the warnings? Although talk of a year-end rally is imminent, several recent rally attempts have failed, Wall Street’s CBOE Volatility Index VIX,
or “fear gauge,” was 22.86 at Friday’s close. A drop in the VIX below 20 could mean that investors’ fears about potential market turmoil are easing.
US stock indexes closed Friday with the S&P 500 down 0.7%. The Dow index fell by 0.9%, and the Nasdaq fell by 0.7%. The three major indexes posted significant losses for the week, with the S&P 500 down 3.4% for the week. The Dow is down 2.8% this week, while the Nasdaq Composite is down nearly 4%, according to Dow Jones Market Data.
Next week, not long after the CPI and the Fed decision, investors will get November retail sales data and the industrial production index on Thursday, followed by flash PMI readings from S&P Global on Friday.
–– Joseph Adinolfi helped report this article.
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