Published December 22, 2023
Just what is the Santa Claus Rally on Wall Street? Contrary to what many believe, the Santa Claus Rally phenomenon only takes place in the very brief window of December 24 – January 5. That period covers only eight trading days this year. The stock market delivers positive return almost 80% of the time during the two weeks with an average return of +1.32%.
More importantly, the Santa Claus period often sets the tone for the following year. As shown in the table below, a negative Santa Claus period usually leads to a losing following year, or at best, a fairly weak positive return.
While we are highlighting work by Ryan Detrick at Carson Investment Research, we will repost his writeup of their 2024 outlook, an projection based on historical market data rather than any economic prognostications. This analysis was published in early November.
“2023 has been a year unlike any other; then again all years are unlike other years. From everyone expecting a recession and continuation of the bear market at the start of the year, to the regional banking crisis in March, to one of the best first halves to a year for stocks ever, to a seasonally rough third quarter, to the terrible war in the Middle East, to the standard late October low and year-end rally. Yes, I’ve added that last prediction ahead of time, but we do feel confident we will see a chase into the New Year.
It really is amazing though how this year has played out to form. Pre-election years tend to be strong, especially when you have a new President. Not to mention there still hasn’t been a recession in a pre-election year since WWII. August and September were rough, and stocks corrected into a typical late October panic low. Sure, things weren’t that simple, but when you look back, it is incredible how well things played out to the potential script.
So, what could be next? Do we think this bull market that started in October 2022 has legs? We sure do. In the end it comes down to the macro backdrop and as we’ve explained for months now, the economy is on firm footing. Sure, things are ‘slowing down’ some, but we like to say they are normalizing, not slowing down. Could we really keep growing at 400k jobs a month like last year? No, but a steady 150k to 200k is perfectly normal and in line with pre-COVID trends. The consumer remains strong, and incomes are growing at a very healthy clip as well. If we can avoid a recession next year (our base case), then we think the chances of a year with potential low double digits returns is quite likely.
What will help drive stocks higher and likely to new all-time highs during the first half of next year? At the end of the day it is earnings. We’ve seen analysts continue to come in way too low on estimates and this trend likely continues. The third quarter was expected to see earnings fall slightly, now S&P 500 earnings are expected to come in HIGHER close to 6 percent. Looking ahead, companies in the S&P 500 now expect to see record profits over the next 12 months. You know what tends to happen when profits are at a record? Stocks tend to follow, something we expect to see in 2024.
Potentially even more surprising than record profits is that profit margins are improving. What have we heard nonstop for the past year? Profit margins are too high and must fall. Well, since March we’ve seen forward 12-month profit margins increase. If both profits and profit margins increase next year, that should be a nice tailwind for equities.
We noted many times that a pre-election year tends to see strong equity returns, which has played out nicely once again in 2023. Here’s where things get interesting though. Did you know that under a first-term President the returns tend to be weak early, especially during a midterm year, then get much better during the final two years – the pre-election and election years? Well, so far things have played out quite well with a very weak midterm year in 2022 and a solid pre-election year in 2023. Why is this? It could be as simple as when a President is up for re-election there are certain levers they can pull to get the economy, and thus stocks, into a better mood. In fact, 2000 and 2008 were horrible years for stocks, yet those were lame duck Presidents in an election year.
Diving into the data more showed a very interesting development and that is stocks have been higher during an election year of a new President going back to the past 10 Presidents! Even the historically strong pre-election year can’t say that. Higher the past 10 times and up 12.2% on average isn’t anything to ignore; and that is in-line with a potential low double-digit return in 2024.
Market Update
Stocks kicked off another winning week with a +0.5% gain Monday as investors looked to more inflation news out later in the week. A +0.6% rise Tuesday with smallcap stocks popping almost +2% higher as the market’s rally continues to spread to previously unloved areas. The move was reversed Wednesday as investors appeared to finally take some profits after the market’s torrid seven week run. But once more an inflation report refreshed the bulls. Thursday’s reading of the Fed-favored core (PCE) inflation index showed prices up only 3% from a year earlier, continuing to approach the Fed’s 2% target. Adding to the good tidings, semiconductor firm, Micron, issued an upbeat earnings report. Stocks vaulted +1% on the day. Friday brought a quiet +0.2% end to another positive week for stocks.
Stocks made it eight in a row this week shrugging off the market’s first notable decline mid-week. The S&P 500 rose +0.92% while the Nasdaq 100 (QQQ) added +0.95%. Smallcap stocks continue working to catch up rallying +2.63% this week.
Warm wishes and until next week.