"If Santa Claus should fail to call, bears may come to Broad and Wall."
Investors might recognize the above quote from Yale Hirsch, the author of Stock Trader's Almanac and the person who identified and popularized the "Santa Claus rally."
The Santa Claus rally, according to Hirsch, is the tendency for the stock market to rise over a seven-day period that spans the last five trading days of one year and the first two trading days of the new year.
Over the last 31 years, including 2023 to 2024, stocks have risen 24 times, or 77% of the time, during the Santa Claus period. The S&P 500 gained an average of 0.8% during this brief window.
However, the Santa Claus rally is more than just a historical pattern. According to Hirsch, it was also an indicator of how the market would perform in the new year. In his research, Hirsch found that the performance of the stock market during the Santa Claus period correlated with its performance in the new year, which explains the quote above (Broad and Wall is a reference to the location of the New York Stock Exchange).
For example, from 1993 to 2023, in four out of the six times that stocks declined during the Santa Claus period, the S&P 500 ended up down for the year. During that period, the trend also predicted the index's positive return 19 out of 24 years. Put another way, the performance of the S&P 500 during the Santa Claus period successfully predicted the direction of the market in the new year 77% of the time.
Image source: Getty Images.
Why Santa Claus failed to come this year
Heading into the Santa Claus period last month, there was plenty of talk of a rally as stocks had soared in the preceding weeks. Following a bottom on Oct. 27, the S&P 500 jumped 15% through Dec. 21, and it continued to climb through Dec. 28, reaching a closing high of 4,783.35 that day.
However, after stocks climbed through the first four days of the Santa Claus period, the rally promptly broke, and the S&P 500 declined over the next three days as the chart below shows. For the full Santa Claus period, the S&P 500 fell 0.9%.
Data by YCharts.
There was no direct cause for the sell-off. Market sentiment seemed to shift as investors grew suspicious about the prospects for Fed rate cuts in 2024, and investors seemed to take the opportunity to sell 2023's winners in the new year, avoiding capital gains tax for another year.
The pullback seems reasonable, considering that stocks rose 16% over the two months leading up to the sell-off on little more than new hints that the Fed would lower rates in 2024.
Will the stock market decline in 2024?
It's important to remember the Santa Claus rally is just one of several indicators available to forecast the following year's results. In fact, it wasn't even the only one that Hirsch used.
The prognosticator identified three metrics that he used to predict the stock market's performance in a new year. In addition to the Santa Claus rally, he also used the first five days of January, and the January Barometer (meaning the stock market's performance during that month).
Like the Santa Claus rally period, the market's performance during the first five trading days of the year and January have historically correlated with its results over the rest of the year.
There's no perfect explanation for the relationship between those indicators and the market's full-year performance. Some observers theorize that retail investors are more active during the period when the calendar turns, which is indicative of broader market sentiment. And investors often use January to rebalance their portfolios and position themselves for the rest of the year.
There's also another indicator that investors should be aware of: In years following gains of more than 20% for the S&P 500, stocks have risen 80% of the time and by an average of 10% during those years.
As tempting as it may be to treat these indicators as the crystal balls many believe them to be, investors should avoid fussing too much over these short-term price changes and market-timing exercises. It's always worth remembering a buy-and-hold mindset is what gives investors the best shot at long-term success in the market.
Given the fact the S&P 500 has had a positive year 77% of the time since its inception in 1957, you're as likely as the Santa Claus period to be correct with a prediction that the market will rise in 2024 (or any other year). Its actual performance will be determined by factors like earnings results from market leaders like the "Magnificent Seven" tech stocks, the Federal Reserve's interest rate decisions, and geopolitical events beyond anyone's control or ability to predict.
Still, we do know that the Fed is likely to lower rates and that momentum and enthusiasm around artificial intelligence is likely to persist, and those are both bullish signals. If the economy remains on a path toward recovery, I think that makes an even stronger case than usual for the stock market to register another winning year in 2024.
