Investors are looking for the “Santa Rally” after a gloomy year for US equities

By David Randall

NEW YORK (Reuters) – Bruised investors are hoping a so-called Santa rally could ease the pain of a tough year for U.S. stocks and potentially improve the outlook for 2023.

Without a doubt, the market could be in need of some holiday cheer. In December β€” typically a strong month for stocks β€” the S&P 500 has so far lost about 6%, weighed down by steep declines in shares of Tesla Inc, Inc and other names that had driven markets higher in previous years. The index is down nearly 20% year-to-date and on track for its worst annual performance since 2008.

History shows that the market still has an above-average chance of evening out these losses. U.S. stocks rose during the last five trading days of December and the first two days of January about 75% of the time, showed data from CFRA Research, a model attributed to tight liquidity, tax loss collection and the investment of year-end bonuses.

Friday is this year’s start date for this gathering named after Santa Claus, if it happens. It will only be clear around the second trading day of 2023.

The phenomenon has lifted the S&P 500 an average of 1.3% since 1969, according to the Stock Trader’s Almanac. A December with no Santa rally was followed by a weaker-than-average year, LPL Financial data dating back to 1950 showed.

The S&P 500 averaged 4.1% gains in the year following December without a Santa rally, compared to a 10.9% gain after a period in which one did. January’s gains are also muted in a year without Santa, with the index falling an average of 0.3% versus a 1.3% rise after a year of Santa, the data showed.

“When Santa doesn’t arrive, it typically means there’s something in the market that’s causing confusion or a headwind that he’s facing. The negative sentiment doesn’t change because it’s a new year,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

The sharp decline this month underscores how seasonal trends appear to be offset by concerns that the Federal Reserve’s monetary tightening will plunge the economy into recession.

The S&P 500 has recorded only Dec. 18 with losses since 1950, data from Truist Advisory Services showed. The index gained an average of 1.6% in December, the highest of any month and more than double the 0.7% average gain for all months, according to CFRA data.

This December promises to be one of the exceptions. Investors lost shares at the highest weekly rate ever in the week to Wednesday, selling $41.9 billion net, according to a report from BofA Global Research on Friday. He attributed the sell-off to “tax loss collection,” a strategy that involves selling loss-making businesses to offset capital gains taxes.

β€œThe lack of a ‘Santa Gathering’ this month, with a ‘coal fire sale’ in its place, is a worrying sign for 2023 US stock returns,” DataTrek strategists wrote.

Few economic reports are expected next week, with readings on the US housing market and jobless claims, while stock market liquidity is expected to fall near its lowest levels of the year with many on Wall Street on pause for the holidays.

Much of the market trajectory will be dictated by whether inflation can continue to fall and allow the Fed to stop raising interest rates sooner than expected.

US consumer spending barely increased in November as annual inflation rose at its slowest pace in 13 months, but demand probably isn’t cooling fast enough to discourage the Fed from raising rates. interest next year.

Other measures of inflation also showed signs of slowing, with consumer prices rising less than expected for the second consecutive month in November.

“If investors start to see the economy slow faster than people expect and the Fed ends its rate hikes in the first quarter, we could see a story of two halves” and a strong positive return next year, he said. said Sam Stovall, chief investment strategist at CFRA.

(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)

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