Santa Claus coming to town?
Paid subscriber analysis
During December I will write a series of three articles over three weeks introducing different narratives of what markets might look like in 2024:
The bull case
The bear case
Our macro positioning and targets for 2024
Basically, it’s still a battle between a soft landing and a hard landing narrative. The soft landing was being priced in almost aggressively over the past month. This leaves a lot of room for bears looking at an alternative. But who will be right next year? I’ll present each of these arguments in great detail and then make the final call for our own positioning for next year (just before Christmas).
Don’t miss these insights! They’re available to all of our paid subscribers:
Before we switch to 2024 expectations, there are still 4 more weeks left this year. So today, let’s look at what we might expect in those 4 weeks. Specifically, will there be a “Santa rally”?
First of all, what is a Santa rally? It’s a seasonal, calendar effect where stocks tend to go up in the last week of the year, between Christmas and New Year, often extending into the first week of January as well. However, many are now saying the Santa rally is even longer, and that it tends to last the entire December (basically since US Thanksgiving, especially if it follows existing bullish flows).
The logic (although there’s really no logic here, just seasonality), is that investors are thinking about end-of-year tax implications (sell losers, keep winners, lower supply of winners - like the Mag 7 - pushes their price up), there is seasonal optimism, bigger institutional investors typically settle their books early, take their bonuses and head out on vacation, leaving mostly low volume and retail traders which tend to be more bullish on average.
Of course, this is just pure seasonality, but studies have shown that 80% of the time (from 1950s until 2020) we do get a positive return (1.3% on average) in the last five trading days of December and first two days of January. There’s plenty research looking at this, and most of it finds some effect there.
The effect has, however, waned over the past decade, and in some cases started to happen before Christmas, not afterwards. Although the pre-Christmas effect is definitely not as seasonal as the post-Christmas one. For example in 2021, the pre-Christmas rally was huge, but in 2022 there was a strong sell-off in the same period.
On average, December does end up as one of the best months for stock. Recall this analysis from the newsletter examining the mantra of “sell in May, come back in October”. Doing that you would have sold SPX at 4200 in May, and bought it back at pretty much the same level in October, being up over 10% since. You would have missed a strong rally in June and July, but also the sell-offs in August and September. Basically staying long the entire time would have been the same - time in the market beats timing the market, ey? Depends on how well you handle drawdowns!
Therefore, given the recent bullish flows we’ve had since Nov 1st, can we expect a Santa rally coming early during December?