"Santa Claus" Rally ?

On November 12 on BNN's "the Close" with Michael Hainsworth, Michael asked me whether I thought there would be a Santa Claus rally. I suggested that I thought that Santa had come early and or it was more like a "Trick or Treat" rally (given that it appeared that the move from Aug.24th's lows to a peak on or about Nov. 3 had run its course).

What is a "Santa Claus" Rally?

It is loosely defined as a rally in the stock market in the weeks before Christmas and into the New Year. Traditionally, the Santa Claus rally has occurred between Dec.15 and Jan.6:

Since 1950, the S&P 500 index has gained an average of 2.13% during this year end stretch, and was profitable 80% of the time, according to the Stock Trader's Almanac. 

The sector with the best performance over the last 25 years between Dec.15 and Jan.6 is materials.  Significant gains have also been logged by energy, industrials and financials. Consumer staples has been the worst performing sector.

One of the biggest reasons for the rally is the burst of special  dividends and increased share buybacks that are frequently announced before the end of the year. Additionally "window dressing" usually helps  lift stocks in December. Mutual funds and money managers are inclined to polish their portfolios before the end of the year. They will buy winners and shed underperformers. This activity tends to drive volume and sends stocks higher.

On the Nov.12 BNN interview I also suggested that oil prices would likely move lower dragging the C$ close to $US.70 and that the Fed would raise rates by 1/4% at its Dec. 15 and 16 meetings. I am not normally one to make predictions, but felt it was only polite to answer Michael's questions, so I proffered my best educated guesses. 

Had I known at the the time that history would have an 80% chance of proving me wrong, I might not have been so quick to offer up my opinion that there would be no "Santa Claus" rally.

However, the fundamentals, as we see them, just didn't make sense (as I have been fairly vocal about both on this blog and the weekly, Tuesday High Rock webinars) to drive equity prices higher.

With volatility at higher levels a 2% (average SC rally move) move in equity markets is certainly not out of the question. So technically, I may be proven wrong (especially in the short run).

Last week, on the day the Fed did raise rates, I was invited back to BNN's "The Close" to offer my opinion on what that might mean to financial markets and the global economy. On that day alone, the S&P 500 was up by 1.5%. 

Since then the S&P 500 is lower by 3.2% (Fridays close).

So, as we have also suggested quite frequently, with diverging global monetary policies, volatility will likely continue to be the biggest issue for global financil markets.

Volatility creates uncertainty and reduces confidence.

When individuals and businesses are not confident, they postpone economic decisions and economic growth suffers.

How do we protect ourselves?

Balance, diversity  and perhaps a little extra cash. Don't put new money to work in over-valued assets. Wait patiently for over-valued assets to return to more reasonable levels.

No need to chase or even hope for a "Santa Claus" rally, because in the long run (beyond Jan. 6), it won't much matter. 

Re-balance regularly: sell out-performing, over-weight (in your portfolio) assets and buy under-performing, under-weight (in your portfolio) assets.

Most importantly: Enjoy the holiday season!

scott@highrockcapital.ca