One day over 50 years ago, a man named Yale Hirsch noticed an interesting pattern. Starting with the first trading day after Christmas and going through the second trading day of January, the S&P 500 usually increases in value. Hirsch dubbed his discovery the Santa Claus Rally.
It looks like good ol' Saint Nick is working his market magic again in 2023. As of this writing, the S&P 500 has started another Santa Claus Rally this year.
The Santa Claus Rally isn't the only stock market pattern that Hirsch noticed. Two other patterns were January's First Five Days and the January Barometer.
Here's the exciting part: When there's a Santa Claus Rally (like now), the other two patterns tend to generate positive returns as well. This is known as a trifecta, and a trifecta points to positive full-year returns over 90% of the time, according to Hirsch's "Stock Trader's Almanac."
To many investors, this might sound like an investing crystal ball. If there's a Santa Claus Rally, just buy an S&P 500 index fund for the upcoming year because the odds are extremely high that it'll make money.
While that might technically be true, it might not be true for the reason that many think. There's a far simpler and more surprising truth sitting just beneath the surface.
The trend that's even stronger than Santa Claus
Certain things in life tend to happen anyway.
For example, when I eat at a restaurant, they usually get my order correct. Occasionally, something gets mixed up, but it's rare.
Let's suppose that I analyzed my attire and found that when I wear a hat, the restaurant usually gets my order correct. Well, I think everyone would agree that's somewhat silly. Restaurants normally get the order right anyway -- the hat is irrelevant.
The thing is, the S&P 500 goes up most of the time. Since 1926, the market has only had a down year 26 times. The S&P 500 has consequently registered annual gains a whopping 73% of the time over the last 98 years -- that's basically three years out of every four.
Therefore, any market pattern (such as the Santa Claus Rally) that points to annual gains for stocks is likely to be right.
Image source: Getty Images.
What does this mean for investors in 2024?
Last December, I outlined four concrete reasons I believed there would be a bear market in 2023. I still believe my reasoning was solid, but the S&P 500 is up 24% year to date as of this writing, far outpacing its annual average. In other words, I was dead wrong.
I could lay out solid reasoning for a stock market crash yet again in the coming year, but statistically speaking, I'll be wrong once more. There's almost always something to worry about regarding the economy and markets. But most of the time, fears are overblown, and more often than not, the stock market will go up.
Being aware of this, I stayed fully invested in 2023 even though I believed a bear market was very possible, and staying invested has proved to be a great decision. My top three positions in my retirement account -- MercadoLibre, Axon Enterprise, and United Rentals -- all had sensational market-beating performances this year. If I had sold, I would have left a ton of money on the table.
Data by YCharts.
It's like what investing great Peter Lynch says: "Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves."
This is why I don't plan to sell my stocks going into 2024 either. I could try to perfectly time a mountain peak, sell before a crash, and buy back in at lower prices. But that's hard to do when the odds say the market should keep going up.
It might seem too simplistic, but predicting an up market in the coming year is based on evidence going back 98 years. It's one of the more logical predictions an investor could make.
The Santa Claus Rally is telling investors to prepare for the stock market to go up in 2024. Then again, that's normally the case anyway. With this in mind, it's important for investors to not sell prematurely out of fear but rather invest in businesses that are set to grow and profit over the long term.
