By Mark Hulbert
Can Santa Claus take any of the credit for the stock market's impressive performance over the past couple of weeks?
The widespread media narrative is that the run-up has been Wall Street's reaction to resolving the uncertainty over who will be the next president, and it is true that the stock market typically rallies in the immediate wake of presidential elections. But another narrative that is getting credence in some Wall Street circles is that credit also goes to a so-called Santa Claus rally.
But how much credit? By analyzing stock market history, it's possible to assess the relative roles played by these two possibilities. That's because Santa Claus visits Wall Street every year and a presidential election occurs every four years. If what otherwise appears to be a Santa Claus rally occurs only in presidential election years, for example, then we could conclude that credit for that rally goes to a postelection resolution of uncertainty rather than to Saint Nick.
Assessing credit is more than just idle curiosity, since each narrative carries different implications for how the stock market will perform in coming months. If Santa is the primary cause of the recent rally, then it is likely to last for just several more weeks at most.
One factor complicating this assessment is that few of the analysts who refer to a Santa Claus rally bother to define exactly what it is. The analysis below, based on the Dow Jones Industrial Average back to its creation in the late 1890s, focuses on three implicit definitions of a Santa Claus rally that I have gleaned from analysts' commentary over the past several decades.
Seasonal strength in November and December. Some analysts who refer to a Santa Claus rally have in mind above-average stock market strength in November and December. And there certainly appears to be support for their belief, as you can see from the accompanying table.
Average DJIA return
All two-month periods across the entire calendar 1.2%
All November-December periods 2.6%
November-December periods of presidential election
years 3.3%
Notice that the stock market is indeed unusually strong in the November-December periods of presidential election years -- outperforming the overall two-month average by 2.1 percentage points. Santa Claus can take credit for 1.4 of those percentage points, since on average across all years -- presidential election years and nonelection years alike -- the DJIA's November-December average performance is 2.6% versus the 1.2% average across all two-month periods in the calendar. The post-presidential-election rally gets credit for the remaining 0.7 percentage point (3.3% versus 2.6%).
Using this definition of a Santa Claus rally, therefore, history would suggest that two-thirds of the current rally could be due to Santa Claus and one-third due to a postelection rally.
Greater rally potential in November and December. Other analysts who refer to a Santa Claus rally appear to have a different definition in mind. For them, Santa's imminent arrival doesn't mean that the market's overall November-December return is especially strong, but that, at some point over those two months, the stock market will mount an unusually strong rally.
To measure this rally potential, I calculated the average DJIA return from the stock market's November low to its December high. This gain is hypothetical, of course, since only in retrospect can we know when the low and the high have occurred. But measuring the stock market's gain in this way does capture the theoretical maximum extent to which the market could rally during the last two months of the year.
To put this rally potential for the November-December period in context, I repeated the calculation for each of the other months of the calendar. The accompanying table reports what I found.
Average DJIA return
Average two-month rally potential across entire calendar
(from each month's low to subsequent month's high) 7.3%
Average two-month rally potential for all
November-December periods 7.6%
Average November-December rally potential in presidential
election years 8.1%
Using this definition, the Santa Claus rally deserves credit for less than half of the rally potential in presidential election years (0.3 of 0.8 percentage point, or 38%).
Christmas through the first two trading sessions of January. The third definition of a Santa Claus rally that I've come across is abnormal stock market strength from Christmas through the first two trading sessions of January -- a seven-trading-session period. This period hasn't begun yet, needless to say, but I mention it because it sheds light on the relative strength of the Santa Claus and post-presidential-election rallies.
The table below summarizes what I found.
Average DJIA return
All seven-day periods across the entire calendar 0.2%
Christmas through first two trading sessions of January
of all years 1.6%
Christmas through first two trading sessions of January
following Presidential elections 1.8%
Using this definition, as you can see, Santa Claus is a stronger force than the postelection rally. It accounts for 1.4 points of the 1.6-percentage-point increase in average return experienced in the wake of presidential elections -- or 88%.
The bottom line? Depending on the definition one uses, the Santa Class rally historically has accounted for between 38% and 88% of the stock market's typical strength in the two months following presidential elections. Assuming the next several weeks live up to that historical pattern, therefore, the current rally will likely be largely spent by the beginning of next year.
Mark Hulbert is a regular contributor to Barron's. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com .
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(END) Dow Jones Newswires
November 25, 2024 02:00 ET (07:00 GMT)
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