Seasonal Strategies

Market Outlook December 2019: Santa Claus Rally & Yearend Highs

The beat rolls on. In the face of ongoing geopolitical and U.S. political volatility, machinations and all the noise, equity markets continue to march higher. While economic growth has slowed underlying strength remains evident. Market internals still have room for improvement with the Advance/Decline positive but not on the same trajectory as the indices and a dearth of new 52-week highs.

If election-cycle politics come into play, we will either get a deal in principle before the December 15 date when new tariffs are supposed to kick in or the White House will kick the can into next year and delay the new tariffs some more so they can settle on an initial agreement with the Chinese well ahead of the 2020 Presidential Election.

In any event, seasonal strength is firing on all pistons as it has been all year, pushing the market to new highs and the Dow over 28000. As is often the case we had a little pull back the week before Thanksgiving after hitting the 28000 milestone, likely triggered by comments related to delays in completing “Phase One” of the trade deal with China.

Going back to 1949 we are on pace for the 10th biggest year-to-date through November gains for the S&P 500 – and it’s a healthy sign for the rest of the year and next. We crunched the numbers for the S&P 500 YTD gains as of the end of November. Average YTD November gains are 7.4%. The list below shows the Top 21 YTD November gains that are all twice the average, which we felt best represents the current situation.

Following Decembers and following years have had solid performance and average to slightly better than average results. After big YTD gains December is up 71.4% of the time with an average gain of 1.7% and the next year is up 81.0% of the time with an average gain of 9.9%. This reinforces our positive outlook for the rest of 2019 and 2020.

Top 21 November YTD S&P 500 Gains table

Fourth quarter seasonal strength is rather apparent in the updated accompanying chart of Pre-Election Year Seasonal Patterns overlaid with 2019. November 2019 has been stronger than usual, especially for a pre-election year, with DJIA up 2.7% for the month as of the 11/21/2019 close, S&P 500 up 2.2% and NASDAQ up 2.6%.

Pre-Election Year Seasonal Pattern Chart

Tax-loss selling often kicks in the first half of December, creating a soft patch for the market early in December. This is also evident in the chart here. The old “January Effect” of small caps outperforming large caps in January begins in mid-December. Then the Santa Claus Rally comes to town.

As soon as Thanksgiving comes around on the calendar – or even Halloween – all the talk on The Street is: “Will we or won’t we have a Santa Claus Rally?” But they all refer to it as the 4th Quarter Rally or the November-December Rally or the December Rally or the Halloween-New Year’s Rally or the Thanksgiving-Christmas Rally.

Yes, the market has a strong tendency to rally smartly in Q4, but that is not the Santa Claus Rally. The Santa Claus Rally was discovered and named by Yale Hirsch in 1972 and published in the 1973 Stock Trader’s Almanac. As defined by Yale and detailed on page 116 of the newly released 53rd Annual 2020 Edition:

“Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January. This has been good for an average 1.3% gain since 1969 (1.3% since 1950 as well). Santa’s failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. We discovered this phenomenon in 1972.”

To Wit, Yale’s witty rhyme which has become the headline of our “Santa Claus Rally” page and the battle cry of market pundits during the holiday season: “If Santa Claus Should Fail To Call, Bears May Come To Broad And Wall.” After last year’s debacle and Christmas Eve Crumble for the market, the SCR was our first confirming bullish indicator that we had reached a bottom on December 24, 2018 and that the prospects for 2019 were quite positive.

Finally Pre-election Years tend to make their highs around yearend and 2019 has been tracking this pattern to a T this year. So after a little chop between now and mid-December we expect further new highs.