This year we’ve seen inflation hitting a 40-year high, interest rates soaring to levels not seen since ’08, a war in Ukraine (that’s still very much going on), the biggest squeeze in our incomes in 100 years which all made for a totally unprecedented year in that stocks and bonds both went down. Together. Nice one! So thanks to all this, if you owned stocks/bonds, or both, you lost money on it all. How much? The average retail investor’s portfolio is down 40% this year and if you’re the owner of Nasdaq stocks, that’s down 32% this year while the S&P 500 is down 20%.
Thought diversification would save you? Well guess again! The 60/40 portfolio (60% stocks, 40% bonds) had its worst year since 1938! Kinda puts things into perspective, doesn’t it? I’ve lost money on most my investments this year. And the ones that held up were the ones that lost me the least amount in % terms. My UK holdings actually did alright – the FTSE 100 was one of the best performing markets of 2022. Oh, and by ‘best’, I mean it didn’t lose as much as some other markets.
A pretty brutal year, in other word! And if all this wasn’t enough for our poor portfolios to deal with, we’re grappling with the prospect of a recession as we head into 2023. Ugh. Party pooper. And not just any old recession, a recession to end all recessions. The geeks out there reckon corporate earnings just aren’t factoring in the extent of these rate hikes; inflation (wages are proving to be super sticky) along with the slump in consumer demand that’s bound to come. As if it hasn’t started already.
How bad this’ll be majorly depends on whether the Fed manages to — or even wants to! —  engineer of a softish landing. I think we can all agree that we’re way past “soft”. Markets are forward-looking so they’ll start to price in the nastiness of a recession before it actually happens. Just something to keep in mind.
If there’s ever been a time for Santa to pay a friendly visit Mr Market it’s this year! We had a recent relief rally but a Santa rally would be extra special. It’ll give us that festive cheer our portfolios are so desperate for. At least let this year end on a sweet note! Pleeeeease!
What’s this “Santa rally”?
This rally refers to the brief period of time at the end of Dec when stocks go up. It’s a bit iffy whether this is a psychological rally or if there’s some concrete (financial) explanation. The psychological bit makes perfect sense to me. It’s holiday season! We feel good. We’re out spending (inflation or no inflation!). We’re merry.
Plus, now that we know that stocks go up in this period, it could be a self-fulfilling prophecy! We buy stocks because we think they’ll go up which in turn causes them to go up. Yay.
What do the numbers say?
Either way, if history’s any guide to go by, we can expect stocks to go up in the final 5 trading days of Dec (start the countdown!) stretching into the first 2 days of Jan.
Yale Hirsch first documented the pattern in 1972. He found that the S&P 500 gained an average 1.5% during that seven-day trading period during 1950-1971. Good news: the pattern has held true since the 50s, with the broad market index increasing by around 1.3%! The market went up during those 7 days more than 75% of the time. Pretty good odds, guys!
If you want some more proof: during the crash of ’08, Santa came to town and during those 7 trading days (end of Dec into Jan), S&P 500 gained a mad 7.5%. And guess what? In 2009, the broad-market index gained 23%!
On the other side of things, to quote Hirsch: “If Santa Claus should fail to call, bears may come to Broad and Wall”. This was a reference to the location of the NYSE, btw!
No Santa? No cheer.
When Santa didn’t come to visit, this could predict doom to come for the year ahead. Uh-oh. But correlation is not causality! Just because the Santa rally comes (or not) and often predicts the market the following year, that doesn’t make it 100% fool-proof.
The market mood can change. A year-end rally does not mean that next year will be swell for stocks. And vica versa. Just something to keep in mind to avoid any disappointments! Talking to myself here.
Since 1994, though, stocks have risen 23 times during the Santa Claus rally period. When Santa came to town, the following year has been positive for the S&P 500 18 times. Of the 6 times that stocks have fallen during the Santa Claus rally period, the market has fallen in 4 of the following years.
Not long to go till it gets put to the test.
Fingers crossed that we’ll be getting Santa to visit and not the Grinch!
Indulge in this most beautiful season and try not to look at your portfolio. You don’t want it ruining the festive mood!
Happy Holidays!! It’s been so great writing to you.
Disclaimer: This is not investment or financial advice. It is my opinion only. This is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment
Knead Your Dough 