No Santa Claus Rally For 2020; He’s Social Distancing

Researchers have suggested a variety of theories as to why the Santa Claus rally happens. Some cite a general feeling of optimism and the investment of holiday bonuses. Others offer more concrete reasons, including tax considerations or the idea that more bullish retail investors tend to take control of the market when institutional investors go on vacation over the holidays.

The annual Santa Claus rally, which routinely takes place in December, may opt to social distance this year. Why? Well, for starters, the S&P 500 has already risen 10.9% in November, the 22nd-best month for the S&P ever. It was the second-best November in history, which is directly tied to biotech companies reporting nearly 100% efficacy on their vaccines trials.

Yardeni Research says the S&P 500 normally rises 1.3% December, which is higher than the average monthly gain of 0.64%. The index closed green in 67 of the 92 Decembers– the highest frequency of gains of any month. This December could shake out a little differently than in the past, as 76% of S&P 500 components are trading above their 50-day moving averages. Canaccord Genuity Strategists say the index is in “extreme overbought” territory.

“Expect a tactical near-term correction,” Tony Dwyer, chief market strategist at Canaccord Genuity, noted. Dwyer said in an interview he doesn’t think there will be a technical correction, where stocks puke 10% or more, but rather a downtick of several percentage points. Others agree. “Headline risk will be elevated over the next few days,” Dennis DeBusschere, head of portfolio strategy research at Evercore, wrote in a note. “Expect some consolidation in risk assets into year-end ahead.”

Santa Claus visits the stock market about four out of every five years, suggesting the rally is real. A Santa Claus rally has materialized about 79% of the time since 1950. S&P 500 returns during the last five trading days of December and first two of the subsequent new year were positive for 55 of the 70 years between 1950 and 2020 – and negative for only 15.

Sadly, December’s gains may fizzle out as the year ends. The S&P 500 is up 1.7% for the month and is down almost 1% since December 4. Investors are expecting billions of doses of vaccines to be sent out in 2021, meaning much of the upside of that for stocks has been realized, while any distribution gridlocks present downside risks.

Investors also expect fiscal stimulus to happen soon, but if a deal doesn’t happen by February, stocks would react negatively, Jeff Mills, chief investment officer at Bryn Mawr Trust Wealth Management, said. The fiscal stimulus bill, which looks to be progressing toward passage, would provide cash to small businesses and households to aid them until pandy restrictions are eased.

Just as the statistics show the market could be shaping up for a short rest, fund managers are getting close to fully invested. Hedge Funds’ long exposure to stocks recently hit its 75th percentile historically and institutional fund managers surveyed by Bank of America [$BAC] are sitting on an average of 4% of their portfolios in cash, an allocation that has dropped sharply in 2020 from 6% in March. This, according to Bank of America, is a “sell signal” and generally indicates the S&P 500 will fall 3.2% in the coming months.

Over the past 10 years, Santa Claus rally effects have been relatively muted. Between 2010 and 2020, the stock market saw an average Santa Claus rally of only 0.38%, compared to 1.33% from 1950 to 2020. From 2014 to 2015 and 2015 to 2016, the S&P 500 declined by 3.01% and 2.27%, respectively, during the last five trading days of December and first two of January. Most recently, the S&P 500 gained about nine points – or an increase of 0.29% – during the last five trading days of 2019 and first two of 2020.

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