Wall Street speculates as the year winds down whether Santa Claus deserves some credit for recent stock market performance.
Many attribute the S&P 500’s 25% gain year-to date and current trading above 6,000 to the post-election rally that followed the November 5 US Presidential election.
A potential Santa Claus rally has also gained attention in the financial world.
What is the Santa Claus Rally?
A Santa Claus rally is a sustained increase in the stock market that occurs around Christmas, usually during the week before December 25th or between Christmas Day and January 2.
Retail investors investing their holiday bonuses, year-end tax strategies and holiday optimism are all possible explanations.
In addition, many institutional investors go on vacation during this time, leaving the market to be influenced primarily by retail traders who are more bullish.
This trend is a result of increased holiday shopping, positive seasonal sentiment and the rise in stock prices during the festive season.
Goldman Sachs: Buybacks and retail investors will fuel rally
Goldman Sachs is one of Wall Street’s top investment banks. They are optimistic about the market’s momentum at year-end, predicting a 4% increase in the S&P 500, which will close 2024 with 6,200.
Scott Rubner, Goldman Sachs’ trader, said that the anticipated rally would be driven by retail investors’ appetite for equities, cryptocurrencies and a surge in share buybacks.
Rubner’s note for clients suggests that the rally may start this week, coinciding Thanksgiving weekend, which is traditionally a time of optimism on the markets.
In December, corporate share buybacks are expected to increase, which will add to the bullish sentiment.
Goldman Sachs has also noted record inflows of equity funds over the past three months, the largest since the year 2021. The momentum is picking up after the presidential election.
The S&P 500 gained 3.2% between November 5 and November 10, while the Russell 2000, a measure of small-cap stocks grew 6.5% during the same period.
In the past, US presidential elections provided a significant boost for stock markets.
Investors anticipate the policy direction of the new administration and the uncertainty will fade in the weeks that follow the election.
Goldman Sachs reported that in typical election-year rallies, they often extend well into January and then taper off around the inauguration day of January 20.
Rubner is still bullish about US stocks going into 2025 and believes that the current rally may continue into the New Year.
Parsing the rally – Santa Claus vs. Post-election factors
Examining historical patterns is the best way to determine the relative contribution of the Santa Claus rally, and the post-election momentum.
Seasonal strength between November and December
In election years, the average return of Dow Jones Industrial Average between November and December is 3.3%. This compares to 2.6% for non-election year.
The stock market tends perform exceptionally well in presidential election years during the November-December time period, with the average DJIA return exceeding 2.1%.
This means that two-thirds can be attributed seasonal factors, and one-third to the resolution of election uncertainty.
Rally Potential in the Last Two Months of the Year
Financial analyst Mark Hulbert, in a Barron’s article, calculated hypothetical gains based on the DJIA’s movement between its November low and December high.
He found that only 38% of rally potential in election years is tied to Santa Claus. The remainder is influenced by factors post-election.
The dominance of Santa Claus may cause rallys to peak early in the next year
Hulbert found that historically, the Santa Claus rally contributed between 38% and 88% of market gains post-election.
It accounted 88% of the 1.6-percentage point rise in average returns following presidential elections.
If trends follow historical patterns then the current rally could peak as early as next year.
The implications of 2025
Understanding the drivers of the current rally will have implications for 2025.
If the gains in the market are attributed primarily to the post-election momentum then the rally could continue well into the New Year, supported by policy clarity, and investor optimism.
If Santa Claus is the main driver, gains may start to taper off in mid-January due to a seasonal ebb of enthusiasm.
Goldman Sachs’ bullish forecast underscores its confidence in retail participation and corporate buying backs.
Analysts warn that inflation, interest rates and geopolitical tensions may temper gains in the months to come.
What to watch at the end of the year
Investors will be watching economic data, corporate earnings and Federal Reserve policy to gauge whether the rally is sustainable.
Wall Street is currently poised to close the year in a positive manner, as both seasonal and election trends are converging into a favorable environment.
Santa Claus, and the post-election spirit could make this holiday season merry for investors as the S&P500 approaches the 6,200 mark.
What could this post-Santa Claus rally and postelection surge mean for markets? This article may be updated as new information becomes available
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