Santa Rally: Why the S&P 500 tends to climb this time of year?

<p><strong>By <a href="http://investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a> </strong></p>
<ul>
<li>SPX500_m pushing higher today to kick off “Santa Rally” period</li>
<li>“Santa Rally” period typically refers to last trading week of December and first 2 trading days of new year</li>
<li>S&amp;P 500 has climbed in 4 out of the past 5 “Santa Rally” periods</li>
<li>US stocks soared this year due to AI-mania and hopes for Fed rate cuts in 2024</li>
<li>SPX500_m should have enough reasons to reach new record high next year</li>
</ul>
<p>&nbsp;</p>
<h3>The SPX500_m is edging higher on this first trading day after Christmas.</h3>
<p><em>NOTE: The SPX500_m tracks the underlying S&amp;P 500 index, which is the benchmark used to measure the overall performance of US stock markets.</em></p>
<p>Gains today (Tuesday, December 26th) and in the days ahead, would prove true the seasonal occurrence of a “Santa Rally”.</p>
<p><img decoding="async" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/SPX500_mDaily_9.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="73284d22-fea1-4354-ae18-10b5a2ed4880" data-src="/s3-static/users/user16/SPX500_mDaily_9.png" /></p>
<p>&nbsp;</p>
<h3><strong>What is a “Santa Rally”?</strong></h3>
<p>The classic Santa Rally sees <strong>US stock markets rising</strong> around <strong>Christmastime</strong>, and going <strong>into the new year.</strong></p>
<p>According to research going back to 1950, this “Santa Rally” period specifically refers to the <strong>last week of December and the first two trading days of the new year.</strong></p>
<blockquote>
<h3><em>This year-end period has produced a positive return for the S&amp;P 500 nearly 79% of the time.</em></h3>
</blockquote>
<p>Furthermore, December has historically been a favourable month for US stocks.</p>
<blockquote>
<h3><em>According to Dow Jones, the S&amp;P 500 has ended higher in December more often than any other month.</em></h3>
</blockquote>
<p>No other similar duration of trading sessions is more likely to be higher.</p>
<p>The statistics also indicate that this <strong>seven-day span has averaged a 1.3% gain </strong>which is the <strong>third-best seven-day run of the year.</strong></p>
<p>&nbsp;</p>
<p>Still, market commentators tend to use the ‘Santa Rally’ term quite broadly to refer to either the entire month of December or a relatively longer time period.</p>
<p>After all, the SPX500_m has been soaring since early November, and really for much of this year (more on that in a bit).</p>
<p>&nbsp;</p>
<h3>“Santa Rally” happened in 4 out of the past five year-end seasons</h3>
<p>Hence, if we take further liberties with the supposed timeframe, extending it from the <strong>first post-Christmas trading day until the first weekend of the new year</strong>, here’s how the <strong>S&amp;P 500 </strong>has fared during this festive period:</p>
<ul>
<li>2022 – 2023 = <strong>+1.3%</strong></li>
<li>2021 – 2022 = <em>-1%</em></li>
<li>2020 – 2021 =<strong> +3.3%</strong></li>
<li>2019 – 2020 =<strong> +1.4%</strong></li>
<li>2018 – 2019 =<strong> +4.8%</strong></li>
</ul>
<p>Of course in some years, stock markets have performed poorly, as was the case at the <strong>tail-end of 2021</strong> as stocks continued to struggle with the prospects of incoming <strong>Fed rate hikes</strong>.</p>
<p>So, seasonality and calendar theories are not a guaranteed way to make profits as it is tough to predict what will impact markets in any given year.</p>
<p>&nbsp;</p>
<h3><strong>5 potential causes for a “Santa Rally”</strong></h3>
<p>There are numerous reasons why the last few days of December and the first couple in the new year are good ones for stock markets.</p>
<ol>
<li>The January effect is often cited as institutional investors ready themselves ahead of and into the new year, to <strong>set up positions</strong> for the coming weeks and months.</li>
<li>We also see a<strong> rebalancing of portfolios </strong>by major institutions for tax-loss selling in December to close out losses, followed by repurchasing in January.</li>
<li>Certainly, the holiday period is a time of <strong>lower volumes</strong> when liquidity is thin. This can make it <strong>easier for bullish investors</strong> to move markets during the season of goodwill.</li>
<li><strong>Increased holiday shopping and optimism</strong> over the Christmas season may also include investing holiday bonuses.</li>
<li>The impact may simply be a <strong>self-fulfilling</strong> one as investors know about the trend for a Santa rally so will buy stocks accordingly, leading to further gains.</li>
</ol>
<p>&nbsp;</p>
<h3><strong>Santa Rally would cap off a “magnificent” year for US stocks</strong></h3>
<p>Of course, 2023 has seen the<strong> “Magnificent Seven”</strong> take all the plaudits as they have propelled the major indices to (near)record highs.</p>
<p>Here’s a recap of the year so far for these 7 Big Tech stocks:</p>
<ul>
<li><strong>Apple </strong>and <strong>Nvidia </strong>secured new all-time peaks this calendar year.</li>
<li><strong>Tesla </strong>and <strong>Meta </strong>more than doubled (climbed over 100% each) over the course of 2023.</li>
<li><strong>Amazon</strong>, <strong>Alphabet </strong>(Google’s parent company), and <strong>Microsoft</strong> have each recorded year-to-date gains of 82.6%, 60.8%, and 56.2% respectively.</li>
</ul>
<p>All that far surpasses the S&amp;P 500’s year-to-date ascent of 23.8%.</p>
<p>&nbsp;</p>
<p>That said, encouragingly the market breadth has broadened in recent months.</p>
<p>In general, the greater the number of stocks that are helping push the overall market higher, the more support the market has.</p>
<p>&nbsp;</p>
<h3>2023 Recap: What drove US stocks higher this year?</h3>
<p>Simply put, US stocks have climbed higher this year due to the <strong>AI-mania </strong>as well as <strong>hopes for Fed rate cuts in 2024.</strong></p>
<p>This once again shows that markets are forward-looking in nature: today’s prices reflects tomorrow’s expectations.</p>
<blockquote>
<h3><em>For the first half of the year, much of the gains for US stocks had been due to the optimism surrounding artificial intelligence (AI).</em></h3>
</blockquote>
<p>Hence, the stunning double- and triple-digit returns seen for the “Magnificent 7” (Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, and Meta).</p>
<p>&nbsp;</p>
<p>Then, US stocks pulled back between August through October, as doubts started to creep in about whether the AI-mania had gone too far.</p>
<p>Also, this Aug-Oct period was when markets heeded the Federal Reserve’s (Fed) messaging that interest rates could stay higher for longer as US inflation appeared stubbornly elevated.</p>
<p>&nbsp;</p>
<p>However, after the Fed’s final two policy meetings of 2023 (early-November and mid-December), markets ramped up hopes that US interest rates will move lower in the new year.</p>
<blockquote>
<h3><em>Such hopes were solidified when FOMC members (Fed officials who vote on interest rates) themselves projected 75-basis points in rate cuts for 2024.</em></h3>
</blockquote>
<p><em>NOTE: US stocks, especially growth/tech stocks, tend to rejoice at the prospects of US interest rates moving lower.<br />
This is because lower interest rates make it cheaper for such companies to borrow money and expand their respective businesses.</em></p>
<p>&nbsp;</p>
<h3>Can the SPX500_m keep climbing next year?</h3>
<p>US stock markets are expected to enjoy another year of gains ahead, based on 2 key reasons:</p>
<h3><strong>1) The aforementioned Fed rate cuts</strong></h3>
<h3><strong>2) </strong><strong>US Presidential Elections seasonality</strong></h3>
<p><strong>Since 1980</strong>, the <strong>S&amp;P 500</strong> has posted an <strong>annual gain</strong> i<strong>n every single year</strong> featuring a US Presidential Election, except during the 2000 dot com bubble and the 2008 Global Financial Crisis.</p>
<p>&nbsp;</p>
<p>The two factors listed above have even prompted <strong>Wall Street</strong> to forecast a further <strong>7.6%</strong> in gains for the <strong>S&amp;P 500</strong> over the <strong>next 12 months.</strong></p>
<p>If those forecasts prove true, by this time next year …</p>
<blockquote>
<h3><em>We could see the S&amp;P 500 index above the 5,100 mark for the first time in its history!</em></h3>
</blockquote>
<p>&nbsp;</p>
<p>As things stand, the <strong>SPX500_m’s highest-ever intraday price</strong> now stands at <strong>4820.0</strong>, posted on <strong>January 4th, 2022.</strong></p>
<p>That said, barring a “black swan” event that blindsides investors and traders in the coming year …</p>
<blockquote>
<h3><em>The SPX500_m should have enough reasons to set a new record high in 2024!</em></h3>
</blockquote>
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