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MCF Insights: Will the Santa Rally Come Early in 2019?

Or will the Grinch come down from Mount Crumpit and steal our returns?


Back in 1972, Yale Hirsch of the Stock Trader's Almanac proposed the existence of the Santa Rally – and it's been a constant source of eggnog-fueled debate for decades.1

The Santa Rally refers to the general tendency of the U.S. equity markets to post gains in trading days between Christmas and the first two days after New Year’s. 

The Stock Trader’s Almanac found that since 1950, the average movement in the S&P 500 Index during this period of seven trading days has been a gain of approximately 1.4% (excluding dividends).

But is the Santa Rally only a coincidence because it happens to fall in the month of December – which has historically been the best month for the equity markets? Let’s examine.

The December Effect

The stock market has historically done well after Thanksgiving. In fact, since 1950, the market has given investors green numbers the majority of the time.2 

Based on price returns (returns excluding dividends) for the 69 Decembers starting in 1950, 51 brought positive green-gains for investors while 18 produced negative-red returns. The worst was last year when the S&P 500 lost more than 9.0% and the best was December 2010 when it returned almost 6.0%.

The Market Grinch in 2018

Investors are trying to forget that the S&P 500 went negative towards the end of last year, led by the FAANG (Facebook, Amazon, Apple, Netflix, Google) group which officially entered bear market territory after dropping more than 20.0% from their 52-week highs.3

And they are especially trying to forget that shortly after Thanksgiving 2018, the S&P 500 kept posting red numbers on its way to a -9.2% return for the month of December 2018.

The January Effect

Oh, and in case you’re thinking that the January Effect is more important than the December Effect, remember that: 

  • Since 1950, we have seen 41 positive Januarys and 28 negative ones, with an average return of 0.80%.4

Further, while investors want to forget December 2018’s return, do you remember that in January 2019, the S&P 500 returned 7.9%? 

In other words, while December has historically been a better month when compared to January, last year’s December/January was flipped. In other years, both “effects” were positive, and in others, both were negative. The key to remember is the” effects” are not always the same and nobody knows for certain what this year or the next will bring.

Records Through Thanksgiving 2019

Through the end of Thanksgiving week, the performance of U.S. equity markets has been nothing short of fantastic. In fact, the major U.S. equity markets have reached new highs, spurred on by 50-year low unemployment numbers, an accommodative Federal Reserve, a good 3Q earnings season, rising wages, and healthy GDP numbers.5

In fact, the second reading of third-quarter’s annualized growth in Gross Domestic Product was revised up on Thanksgiving week from 1.9% to 2.1%.

This has led investors to give thanks for the performance of the major U.S. market indices through the end of November 2019 – as the DJIA, S&P 500, NASDAQ and the Russell 2000 Index are all up over 20% YTD.

The fact is that U.S. stocks are having their best year in more than half a decade. Bonds are also having a great year, up the most they’ve been in almost 17 years.6

Incorporating the “Effects”

Trying to incorporate the Santa Rally, the December Effect, the Market Grinch, or the January Effect into your investment theory can be dangerous and costly. Empirical evidence shows that time in the market is much more powerful for optimal portfolio returns than trying to time the market. 

The more important aspect of your portfolio should be the “Asset Allocation Effect”. Asset allocation (and disciplined rebalancing when markets move that allocation off-kilter) are the main drivers of portfolio returns over time. As we near the end of another year, it is a great time to review your portfolio. Contact your financial advisor today to ensure your asset allocation is aligned with your specific goals, risk tolerance, and overall financial plan. 

We hope you have a wonderful holiday season and depend on Santa to deliver toys, not investment returns.

1 https://www.stocktradersalmanac.com/AboutUs.aspx

2 https://www.jstor.org/stable/4480498?seq=1

3 https://www.cnbc.com/2019/11/26/stocks-have-a-history-of-positive-trading-around-thanksgiving-but-not-recently.html

4 http://www.apjfs.org/resource/global/cafm/2018-5-1.pdf

5 https://www.wsj.com/articles/stocks-edge-down-ahead-of-start-to-u-s-shopping-season-11575023295

6 https://fortune.com/2019/08/23/making-sense-of-bond-investing-during-a-deeply-unusual-year/

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