As the year winds down, Wall Street is speculating whether Santa Claus can take some credit for the stock market’s robust performance in recent weeks.
With the S&P 500 gaining 25% year-to-date and currently trading above 6,000, many attribute the surge to the post-election rally following the November 5 US presidential election.
However, a potential Santa Claus rally is also gaining attention in financial circles.
What is the Santa Claus rally?
A Santa Claus rally refers to a sustained stock market increase typically seen around the Christmas season, either in the week leading up to December 25 or from Christmas Day to January 2.
Possible explanations include year-end tax strategies, holiday optimism, and retail investors investing holiday bonuses.
Additionally, many institutional investors take vacations during this period, leaving the market primarily influenced by retail traders, who are generally more bullish.
Increased holiday shopping and positive seasonal sentiment also contribute to this trend, making it a unique phenomenon in financial markets during the festive season.
Goldman Sachs: Retail investors and buybacks to fuel rally
Goldman Sachs, one of Wall Street’s top investment banks, is optimistic about the market’s year-end momentum, predicting a 4% rise in the S&P 500 to close 2024 at 6,200.
According to Scott Rubner, a trader at Goldman Sachs, the anticipated rally will be driven by retail investors’ appetite for equities and cryptocurrencies, combined with a surge in corporate share buybacks.
Rubner’s note to clients suggests that the rally could kick off this week, coinciding with the Thanksgiving holiday weekend, traditionally a period of optimism in the markets.
Corporate share buybacks, a consistent driver of stock prices, are expected to accelerate in December, adding to the bullish sentiment.
Goldman Sachs also highlighted record three-month inflows into equities, the largest since 2021, with momentum picking up following the presidential election.
The S&P 500 has gained 3.2% since November 5, while the Russell 2000, which tracks small-cap stocks, surged 6.5% in the same period.
Historically, US presidential elections have provided a significant boost to stock markets.
On average, equities rally in the weeks following the election as uncertainty fades and investors anticipate policy directions under the new administration.
Goldman Sachs noted that in typical election years, rallies often extend into January before tapering off around inauguration day on January 20.
Rubner remains bullish on US stocks heading into 2025, suggesting that the current rally could persist into the new year.
Parsing the rally: Santa Claus vs. post-election factors
Determining the relative contributions of the Santa Claus rally and post-election momentum involves examining historical patterns:
Seasonal strength in November-December
On average, November-December returns of Dow Jones Industrial Average during election years are 3.3%, compared to 2.6% in non-election years.
The stock market tends to perform exceptionally well during the November-December period in presidential election years, exceeding the average two-month performance by 2.1% with all two-month period across the entire calendar showing an average DJIA return of 1.2%.
This suggests two-thirds of the rally can be attributed to seasonal factors, while one-third stems from the resolution of election-related uncertainty.
Rally potential in the last two months of the year
Financial analyst Mark Hulbert in a Barron’s report, calculated hypothetical gains by measuring the DJIA’s movement from its November low to December high.
He found that in election years, only 38% of the rally potential during this period is tied to Santa Claus, with the remainder influenced by post-election factors.
Dominance of Santa Claus factor may cause rally to peak early next year
Hulbert finds that the Santa Claus rally has historically contributed 38% to 88% of post-election market gains.
It accounted for 88% of a 1.6-percentage-point rise in average returns after presidential elections.
If trends follow historical patterns, the current rally may peak by early next year.
Broader implications for 2025
Understanding the drivers behind the current rally has implications for 2025.
If the market’s gains are primarily attributed to post-election momentum, the rally could extend well into the new year, supported by policy clarity and investor optimism.
However, if Santa Claus is the primary driver, the gains may taper off by mid-January, reflecting a seasonal ebb in enthusiasm.
Goldman Sachs’ bullish outlook underscores confidence in continued retail participation and corporate buybacks.
Still, analysts caution that factors such as inflation, interest rates, and geopolitical tensions could temper gains in the coming months.
What to watch as the year closes
Investors will keep an eye on economic data, corporate earnings, and Federal Reserve policy signals to gauge the rally’s sustainability.
For now, Wall Street appears poised to end the year on a high note, with both seasonal and election-related trends converging to create a favorable environment for equities.
As the S&P 500 eyes the 6,200 mark, Santa Claus and post-election cheer might just make this holiday season a merry one for investors.
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