Investors didn't have to wait until the holiday season in December to see a lot of red. They've seen plenty of the color throughout 2022 on the charts of the stocks they own. This year is on track to be the worst for the S&P 500 since 2008.
But it's not out of the question that the stock market could end what's been a dismal year on a decidedly positive note. Will there be a Santa Claus rally in 2022?
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Are Santa Claus rallies real?
Let's first address an important question: Are Santa Claus rallies real? Yes, Virginia, there is such a thing as a Santa Claus rally.
Stocks do sometimes gain momentum at the end of December, which carries over into the new year. In particular, observers have noted this rally often begins during the final five trading days of the year and extends into the first two days the market is open in the new year.
The last time we saw this phenomenon in a truly impressive way was at the end of 2018. Leading up to Christmas Eve, the S&P 500 was down nearly 10% year to date. Then came the Santa Claus rally.
The S&P 500 began a nice run on Dec. 24 that year. By the fifth trading day of 2019, the index was up nearly 10%. That gave investors some really happy holidays.
Most of the time the gains aren't as significant as that one. However, the S&P 500 has increased by an average of 1.3% during the seven-day period associated with Santa Claus rallies since 1950.
The most wonderful time of the year
There are several potential reasons behind the Santa Claus rally pattern for the stock market. Perhaps the most compelling one is that people often have more money to invest in the last trading days of the year and the first trading days of the new year.
Some receive end-of-year bonuses at work. Others receive money as holiday gifts. Many investors also do something called tax loss harvesting in December. The idea is to sell losing stocks to be able to reduce federal taxes for the year.
In addition, these retail investors could impact the market more with their buying during the holidays. Trading volumes are typically lower during the week after Christmas as institutional investors take their vacations.
All of these factors are in place every year. Is there any other reason to think that we could have a Santa Claus rally in 2022? Actually, yes.
The last two major Santa Claus rallies occurred when the S&P 500 was down significantly heading into the holidays. We saw an example of this with the rally at the end of 2018. A bigger-than-normal Santa Claus rally also happened in late 2008.
As mentioned earlier, the S&P 500 is headed for its biggest decline in 14 years. That just might pave the way for yet another super-sized Santa Claus rally.
Ho-ho-hold on
There's one key difference in 2022 from 2008 and 2018, though. In 2008, the U.S. was clearly in a deep recession. In 2018, the economy was chugging along. Today, though, there are legitimate reasons to worry that a recession could be on the way. In fact, a recent Conference Board survey found that a whopping 98% of CEOs are preparing for a recession.
Investors know that stocks nearly always fall during recessions. It's quite possible that economic concerns could slam the sleigh brakes on any potential Santa Claus rally this year.
The good news for long-term investors is that none of this matters. Downturns come and go. But stocks go up over time. Bear markets offer a better gift for investors who want to make money than Santa ever will.
