Wall Street Weekend Week Investors Search for ‘Santa Raleigh’ After Dismal Year for US Stocks

NEW YORK (Reuters) – Bruised investors hope the so-called rising Santa Claus will ease the pain of a difficult year for U.S. stocks and possibly brighten the outlook for 2023.

Without a doubt, the market could use some holiday cheer. In December — a typically strong month for stocks — the S&P 500 (.SPX) has so far lost about 6%, hurt by big falls in shares of Tesla Inc (TSLA.O), Amazon.com Inc (AMZN.O) and others. One of the names that led the markets upwards in previous years. The index is down nearly 20% year-to-date and is on track for its worst annual performance since 2008.

History shows that the market still has a better than average chance of recovering those losses. CFRA Research data showed that US stocks rose during the last five trading days of December and the first two days of January about 75% of the time, a pattern that has been attributed to lower liquidity, the collection of tax losses, and the investment of year-end bonuses.

Friday is the starting date this year for this Santa Claus-named rally – if it happens. It will only be apparent on the second trading day of 2023.

This phenomenon has lifted the S&P 500 by an average of 1.3% since 1969, according to the Stock Trader’s Almanac. Data from LPL Financial going back to 1950 showed that a December without Santa’s rally was followed by a weaker-than-average year.

The S&P 500 gained an average of 4.1% in the year after December without Santa’s rally, compared to a gain of 10.9% after a period in which it occurred. The data showed January gains were also muted in a non-Santa year, with the index down an average of 0.3% compared to a 1.3% gain in a non-Santa year.

“When Santa Claus doesn’t arrive, it usually means there’s something in the market causing confusion or a snag. The negative sentiment doesn’t change because it’s New Year,” said Keith Lerner, co-chief investment officer. Officer at Truist Advisory Services.

The sharp drop this month underscores how seasonal trends seem to have been offset by concerns about whether the Fed’s monetary tightening will plunge the economy into recession.

Truist Advisory Services data showed the S&P 500 has posted just 18 months of losses since 1950. The index gained an average of 1.6% in December, the most in any month and more than double the average 0.7% gain for all months, according to data from CFRA.

December is shaping up to be one of the exceptions. Investors dumped stocks at an all-time high weekly rate in the week through Wednesday, selling a net $41.9 billion, according to a BofA Global Research report Friday. She attributed the sale to “tax loss harvesting,” a strategy that involves selling assets at a loss to offset capital gains taxes.

“The lack of a ‘Santa Claus rebound’ this month, with a ‘bunch of coal sell-off’ in place, is a worrying sign about 2023 US equity returns,” DataTrek strategists wrote.

Few economic reports are due next week, with readings on the US housing market and jobless claims, while stock market liquidity is expected to drop near its lowest levels of the year with many on Wall Street idling for the holidays.

Much of the market’s path will be determined by whether inflation can continue to fall and allow the Federal Reserve to stop raising interest rates sooner than expected.

US consumer spending barely rose in November, while annual inflation increased at its slowest pace in 13 months, but demand likely isn’t cooling fast enough to dissuade the Fed from raising interest rates next year.

Other measures of inflation also showed signs of slowing, with consumer prices rising less-than-expected for the second straight month in November.

“If investors start to see the economy slowing more quickly than people expect and the Fed ends its rate hikes in the first quarter, we could see a story of two halvings” and a strong positive yield next year, said Sam Stovall, chief investment officer. Strategist at CFRA.

(Reporting by David Randall). Editing by Ira Yosibashvili and Richard Chang

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