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Market Insights

Santa rally then 5000? S&P 500 | Skilling Market Insights

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It’s the most wonderful time of the year...

The big question: Will Santa bring a market rally in time for Christmas?

First up, we need to define the Santa rally. Many believe that it applies to the full month of December, but that’s not necessarily true.

The Santa Rally was first recorded by Yale Hirsch in his Stock Trader's Almanac in 1972 and referenced the last 5 trading days of December and the first 2 trading days of January.

Wait. Are you saying the Santa Rally’s not real?

No! It’s definitely real, but it’s ONLY referring to those 7 days, NOT the whole Christmas period.

Just before Christmas last year the guys at LPL Research ran the numbers (right back to 1950) and found:

  • Out of the full year, there isn’t a single seven-day period more likely to be higher
  • This 7 day Santa Claus period has been the best return period of the year 77.9% of the time
  • These seven days are up an average of 1.33%, the second-best seven-day combo of the year

The best thing about the Santa Rally is that no-one really knows why it happens.

So, can it happen again this year?

Let’s take a look at the monthly chart for the S&P 500:

sp500

Since January, the only negative month seen so far this year is September.

As things stand the S&P sits at 4700, up by 116% since the Covid lows in March 2020

Can we really expect that 7 day Santa period to outperform against that backdrop?

Whilst many foresaw positive returns for the index this year, few expected the gains we’ve seen so far....

Indeed, on the 12th of December 2020, Bloomberg compiled the year ahead forecasts from major banks.

These were their predictions.

  • JPMorgan 4,400
  • Goldman Sachs 4,300
  • UBS 4,100
  • Credit Suisse 4,050
  • Barclays 4,000
  • Deutsche Bank 3,950
  • Morgan Stanley 3,900
  • Wells Fargo 3,850
  • SocGen 3,800
  • Citi 3,800
  • Bank of America 3,800

Currently trading 300 points higher than the most optimistic guess!

The strategists are already starting to look ahead to 2022...

  1. Morgan Stanley is predicting a negative year, targeting 4,400 by year end.
  2. Goldman Sachs say investors should expect ‘moderately below average returns next year’ and target 5,300
  3. Wells Fargo sees the economy operating at an above-average pace next year, and targets 5,100-5,300 by year end 2022.

Here’s how that looks on the chart:

sp500 2

It’s only a small set of forecasts so far, yet the most striking thing is the huge gulf already opening up.

In a time of huge uncertainty at the end of 2020 (the vaccines had only recently received FDA approval) the forecast range for 2021 was 600 points.

The range of uncertainty is already 900 points!

And surely that hints that another uncertain and unpredictable year awaits…

So, what’s the point in trying to forecast it…?

As John Kenneth Galbraith said: “*The function of economic forecasting is to make astrology look respectable.*” Perhaps traders will do better to simply block out the noise and trade the price action.

Not investment advice. Past performance does not guarantee or predict future performance.

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