One of the year-end market clichés involves the fat man in a red and white suit. We’re talking about “The Santa Claus Rally,” and if you’re someone who pays any attention to economic or market news, you’ll know that they can’t go 10 minutes without bringing another pundit in to discuss where the the market will end up on December 31st.
While I use a lot of different indicators and statistics to manage portfolios, one of them has to do with seasonality. There are many statistical phenomena in the market where certain investments, sectors, and industry groups perform better during certain times – and worse during other times. When discussing the U.S. stock market (whether it’s the Dow or the S&P 500), Santa Claus does typically come to town, bringing tidings of joy to our portfolios.
The first half of December hasn’t treated our money all that well. A lot of this weak performance was likely due to heavier than usual tax loss harvesting – meaning, people selling investments that have performed exceptionally poor – and there were a lot of these bad investments this year! International stocks, foreign currencies, oil, natural gas, gasoline, gold, silver, copper, and iron ore all struggled big time, as well as most stocks that had anything to do with these industry groups or sub-sectors. When investors sell their investments, the price of those investments go down, regardless of the reasoning behind clicking the sell button.
However, the last half of December is when the Santa Claus rally typically arrives. Going back to the pre-depression era, below you can see returns for both the S&P 500 and the Dow for the first half of December, the 2nd half, and the full month. Believe it or not, The Santa Rally is responsible for almost all of the December S&P 500 returns, and more than the entire month for the Dow!
Source: Dorsey Wright & Associates
Not only might these numbers be surprising to you, but the research also shows that, since 1969, the Santa Claus Rally success rate is just over 73%, which means that in 33 of the 45 years observed, the market had a positive return this last half of December.
With that all said, if this Santa Claus rally does not come to fruition, it is typically not a good sign for the next year. As the saying goes, “If Santa Claus should fail to call, bears may come to Broad and Wall.” In fact, the last four times that Santa skipped out on the rally, the market was either flat or experienced a bear market the following year. If the Dow ends in the negative on December 31st, it will have been the first pre-election year that the market has ended in the red since 1939!
Combine this possibility with 2016 being an election year (not one of the better performing years in the 4-year or 8-year election cycles), and making money could be even tougher than it was in 2015. In fact, next year could end up a lot like this year or worse – where investment success had a lot more to do with what you didn’t own vs. what you did own. In other words, not losing money could be a crucial aim toward investment success in 2016… but we’ll get into more of that in our Market Outlook screencast just after the New Year.
However, we never try to predict because that only gets us into trouble, guessing, and making ill advised decisions in our portfolios. You never get married to an investment you never “wait for it to come back” before you sell it. Famous last words, those are (yeah, that was a Yoda quote). Instead, you stick to your rules, follow the trend, sell your losers, and let your winners run. For now, the US Stock market is still in a positive trend – until it’s not.
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Till next time…
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Disclosures: All index returns are rounded to the nearest tenth percent. All data above sourced via Yahoo! Finance. The proxy used for international investments is the ACWX (all country world index ex-US). The proxy used for commodities is the DBC (PowerShares commodities index). Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam Koos and do not necessarily represent the views of TD Ameritrade and its affiliates. Investing involves risk including loss of principal.